**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **ý**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                        |       |                                                                                                      |
| **For  the quarterly period ended September 30, 2005** |
|                                                        |       |                                                                                                      |
| **OR**                                                      |
|                                                        |       |                                                                                                      |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom            to             **

 

**Commissionfile number 000-31511**

 

**@ROAD,INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                      | ** ** | **94-3209170**                          |
|-------------------------------------------------------------------|------------|-----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |       | (I.R.S. Employer    Identification No.) |

 

**47071Bayside Parkway**

**Fremont,CA 94538**

(Address ofprincipal executive offices, including zip code)

 

**510-668-1638**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

**Yes   ****ý     No**     o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

**Yes   ****ý     No**     o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

**Yes   **o**     No**     **ý**

 

As of November 1,2005 there were 61,062,843 shares of the registrant’s Common Stock outstanding.

 

 

----

 

**INDEX**

 
| **PART I.**  |   | **FINANCIAL INFORMATION**                                                                                                                                                       | 3  |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|              |   | Item 1. Financial Statements.                                                                                                                                              | 3  |
|              |   | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004.                                                                                | 3  |
|              |   | Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2005 and 2004.                                                         | 4  |
|              |   | Condensed Consolidated  Statements of Stockholders’ Equity for the nine months ended  September 30, 2005 and 2004 and the three months ended December 31,  2004. | 5  |
|              |   | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2005  and 2004.                                                                   | 6  |
|              |   | Notes to Condensed  Consolidated Financial Statements.                                                                                                                          | 7  |
|              |   | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                                                                      | 19 |
|              |   | Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                                                                                       | 37 |
|              |   | Item 4.  Controls and Procedures.                                                                                                                                          | 38 |
| **PART II.** |   | **OTHER INFORMATION**                                                                                                                                                           | 39 |
|              |   | Item 1. Legal  Proceedings.                                                                                                                                                | 39 |
|              |   | Item 6. Exhibits.                                                                                                                                                          | 39 |

 

2

----

 

**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

**@Road, Inc.**

**CondensedConsolidated Balance Sheets**

**(Inthousands, except per share data) (unaudited)**

 
| ** **                                                                                                                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                           | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                                                           |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                      |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                           |       | $                      | 42,626     |                  | $          | 14,494 |   |
| Short-term  investments                                                                                                                                                                                              |       | 52,954                 |       | 103,222               |       |
| Accounts  receivable, net                                                                                                                                                                                            |       | 16,178                 |       | 7,960                 |       |
| Inventories                                                                                                                                                                                                          |       | 5,568                  |       | 3,593                 |       |
| Deferred product  costs                                                                                                                                                                                              |       | 19,029                 |       | 11,104                |       |
| Deferred tax  assets                                                                                                                                                                                                 |       | 1,309                  |       | —                |       |
| Prepaid expenses  and other                                                                                                                                                                                          |       | 2,959                  |       | 1,542                 |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total current  assets                                                                                                                                                                                                |       | 140,623                |       | 141,915               |       |
| Property and equipment, net                                                                                                                                                                                          |       | 5,901                  |       | 3,668                 |       |
| Deferred product costs                                                                                                                                                                                               |       | 13,363                 |       | 5,947                 |       |
| Deferred tax assets                                                                                                                                                                                                  |       | 39,955                 |       | —                |       |
| Intangible assets, net                                                                                                                                                                                               |       | 30,613                 |       | —                |       |
| Goodwill                                                                                                                                                                                                             |       | 21,062                 |       | —                |       |
| Other assets                                                                                                                                                                                                         |       | 246                    |       | 680                   |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total assets                                                                                                                                                                                                         |       | $                      | 251,763    |                  | $          | 152,210 |   |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES,  REDEEMABLE PREFERRED STOCK AND   STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                                 |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                     |       | $                      | 8,795      |                  | $          | 5,666 |   |
| Accrued  liabilities                                                                                                                                                                                                 |       | 7,861                  |       | 5,529                 |       |
| Deferred revenue  and customer deposits                                                                                                                                                                              |       | 17,500                 |       | 11,347                |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                                                                           |       | 34,156                 |       | 22,542                |       |
| Deferred revenue                                                                                                                                                                                                     |       | 12,776                 |       | 4,830                 |       |
| Deferred tax liabilities                                                                                                                                                                                             |       | 683                    |       | —                |       |
| Other long-term liabilities                                                                                                                                                                                          |       | 487                    |       | 2                     |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                                                                   |       | 48,102                 |       | 27,374                |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Commitments and contingencies (Note 10)                                                                                                                                                                              |       |                   |       |                  |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Preferred stock,  $0.0001 par value, 10,000 shares authorized, 98 shares designated as  redeemable preferred stock, shares issued and outstanding: 78 at  September 31, 2005 and none at December 31, 2004 |       | 8,053                  |       | —                |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                           |       |                   |       |                  |       |
| Common stock,  $0.0001 par value, 250,000 shares authorized, shares issued and outstanding:  60,767 at September 30, 2005 and 54,805 at December 31, 2004                                                  |       | 277,474                |       | 232,016               |       |
| Notes receivable  from stockholders                                                                                                                                                                                  |       | (8                     | )          | —                |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                |       | (65                    | )          | (179                  | )          |
| Accumulated  deficit                                                                                                                                                                                                 |       | (81,793                | )          | (107,001              | )          |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total  stockholders’ equity                                                                                                                                                                                     |       | 195,608                |       | 124,836               |       |
|                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Total  liabilities, redeemable preferred stock and stockholders’ equity                                                                                                                                         |       | $                      | 251,763    |                  | $          | 152,210 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except per share data) (unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                     |       |                   |       |                   |       |   |   |   |   |
| Hosted                                                                        |       | $                      | 18,965     |                   | $          | 19,102 |   | $ | 58,140 |   | $ | 55,325 |   |
| Licensed                                                                      |       | 6,004                  |       | —                 |       | 7,447 |   | — |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Total revenues                                                                |       | 24,969                 |       | 19,102                 |       | 65,587 |   | 55,325 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Costs and  expenses:                                                          |       |                   |       |                   |       |   |   |   |   |
| Cost of hosted  revenue (excluding intangibles amortization included below)   |       | 10,238                 |       | 8,582                  |       | 28,989 |   | 25,619 |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 1,481                  |       | —                 |       | 3,654 |   | — |   |
| Intangibles  amortization                                                     |       | 1,010                  |       | 7                      |       | 2,477 |   | 28 |   |
| Sales and  marketing                                                          |       | 5,496                  |       | 2,929                  |       | 15,975 |   | 9,122 |   |
| Research and  development                                                     |       | 3,487                  |       | 1,695                  |       | 9,911 |   | 4,493 |   |
| General and  administrative                                                   |       | 4,724                  |       | 3,240                  |       | 13,113 |   | 7,793 |   |
| In-process  research and development                                          |       | —                 |       | —                 |       | 5,640 |   | — |   |
| Terminated  acquisition costs                                                 |       | —                 |       | 139                    |       | — |   | 2,156 |   |
| Stock  compensation (*)                                                       |       | —                 |       | —                 |       | — |   | 4 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Total costs and  expenses                                                     |       | 26,436                 |       | 16,592                 |       | 79,759 |   | 49,215 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| (Loss) income from operations                                            |       | (1,467                 | )          | 2,510                  |       | (14,172 | ) | 6,110 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Other income, net:                                                            |       |                   |       |                   |       |   |   |   |   |
| Interest income,  net                                                         |       | 781                    |       | 426                    |       | 2,128 |   | 1,009 |   |
| Other expense,  net                                                           |       | 17                     |       | (6                     | )          | (135 | ) | (13 | ) |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Total other  income, net                                                      |       | 798                    |       | 420                    |       | 1,993 |   | 996 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net (loss) income before tax                                                  |       | (669                   | )          | 2,930                  |       | (12,179 | ) | 7,106 |   |
| Benefit from income taxes                                                     |       | 34,192                 |       | —                 |       | 37,387 |   | — |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net income                                                                    |       | 33,523                 |       | 2,930                  |       | 25,208 |   | 7,106 |   |
| Preferred stock dividends                                                     |       | (124                   | )          | —                 |       | (305 | ) | — |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net income attributable to common stockholders                                |       | $                      | 33,399     |                   | $          | 2,930 |   | $ | 24,903 |   | $ | 7,106 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net income per share:                                                    |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                         |       | $                      | 0.55       |                   | $          | 0.05 |   | $ | 0.42 |   | $ | 0.13 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Diluted                                                                       |       | $                      | 0.54       |                   | $          | 0.05 |   | $ | 0.41 |   | $ | 0.12 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Shares used in calculating net income per share:                              |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                         |       | 60,740                 |       | 54,498                 |       | 59,571 |   | 54,156 |   |
|                                                                          |       |                   |       |                   |       |   |   |   |   |
| Diluted                                                                       |       | 62,133                 |       | 56,199                 |       | 60,994 |   | 57,424 |   |

 

----

| (*) Stock compensation:    |   |   |   |   |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Cost of hosted revenue     |   | $      | — |   | $      | — |   | $      | — |   | $ | — |   |
| Cost of licensed revenue   |   | — |   | — |   | — |   | — |   |
| Sales and marketing        |   | — |   | — |   | — |   | 1      |   |
| Research and development   |   | — |   | — |   | — |   | 1      |   |
| General and administrative |   | — |   | — |   | — |   | 2      |   |
|                       |   |   |   |   |   |   |   |   |   |
| Total                      |   | $      | — |   | $      | — |   | $      | — |   | $ | 4 |   |

 

See notes tocondensed consolidated financial statements.

 

4

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Stockholders’ Equity**

**Forthe Nine Months Ended September 30, 2005 and 2004**

**andthe Three Months Ended December 31, 2004**

**(Inthousands) (unaudited)**

 
| ** **                                                              | ** ** | **Common  Stock** | ** ** | **Deferred  Stock** | ** ** | **Notes  Receivable  From** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Total  Comprehensive** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------------|------------|-----------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                                              | ** ** | **Shares**        | ** ** | **Amount**          | ** ** | **Compensation**            | ** ** | **Stockholders**                      | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity**               | ** ** | **Income  (Loss)** | ** ** |
| BALANCES,  January 1, 2004                                         |       | 53,700            |       | $                   | 228,441    |                        | $          | (4                                    | )          | $               | (87        | )                      | $          | —                   |       | $ | (116,222 | ) | $ | 112,128 |   |   |   |
| Net  income                                                             |       |              |       |                |       |                        |       |                                  |       |            |       | 7,106                  |       | 7,106                    |       | $ | 7,106 |   |
| Unrealized  (loss) on short-term investments                            |       |              |       |                |       |                        |       |                                  |       | (156            | )          |                   |       | (156                     | )          | (156 | ) |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  income                                                   |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | 6,950 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 243               |       | 1,129               |       |                        |       |                                  |       |            |       |                   |       | 1,129                    |       |   |   |
| Exercise  of stock options                                              |       | 589               |       | 1,328               |       |                        |       |                                  |       |            |       |                   |       | 1,328                    |       |   |   |
| Collection  of notes receivable from stockholders                       |       |              |       |                |       |                        |       | 87                                    |       |            |       |                   |       | 87                       |       |   |   |
| Amortization  of deferred stock compensation                            |       |              |       |                |       | 4                           |       |                                  |       |            |       |                   |       | 4                        |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  September 30, 2004                                      |       | 54,532            |       | 230,898             |       | —                      |       | —                                |       | (156            | )          | (109,116               | )          | 121,626                  |       |   |   |
| Net income                                                         |       |              |       |                |       |                        |       |                                  |       |            |       | 2,115                  |       | 2,115                    |       | $ | 2,115 |   |
| Unrealized  gain on short-term investments                              |       |              |       |                |       |                        |       |                                  |       | (23             | )          |                   |       | (23                      | )          | (23 | ) |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | 2,092 |   |
| Comprehensive  income                                                   |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 221               |       | 1,006               |       |                        |       |                                  |       |            |       |                   |       | 1,006                    |       |   |   |
| Exercise  of stock options                                              |       | 52                |       | 112                 |       |                        |       |                                  |       |            |       |                   |       | 112                      |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  December 31, 2004                                       |       | 54,805            |       | 232,016             |       | —                      |       | —                                |       | (179            | )          | (107,001               | )          | 124,836                  |       |   |   |
| Net  income                                                             |       |              |       |                |       |                        |       |                                  |       |            |       | 25,208                 |       | 25,208                   |       | $ | 25,208 |   |
| Unrealized  gain on short-term investments                              |       |              |       |                |       |                        |       |                                  |       | 114             |       |                   |       | 114                      |       | 114 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  income                                                   |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | 25,322 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued upon acquisition of Vidus, net of issuance costs of $478 |       | 5,454             |       | 37,699              |       |                        |       |                                  |       |            |       |                   |       | 37,699                   |       |   |   |
| Options  issued upon acquisition of Vidus                               |       |              |       | 531                 |       |                        |       |                                  |       |            |       |                   |       | 531                      |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 295               |       | 849                 |       |                        |       |                                  |       |            |       |                   |       | 849                      |       |   |   |
| Exercise  of stock options                                              |       | 213               |       | 383                 |       |                        |       |                                  |       |            |       |                   |       | 383                      |       |   |   |
| Issuance  of notes receivable to stockholder                            |       |              |       |                |       |                        |       | (11                                   | )          |            |       |                   |       | (11                      | )          |   |   |
| Collection  of notes receivable from stockholder                        |       |              |       |                |       |                        |       | 3                                     |       |            |       |                   |       | 3                        |       |   |   |
| Dividends  on redeemable preferred stock                                |       |              |       | (305                | )          |                        |       |                                  |       |            |       |                   |       | (305                     | )          |   |   |
| Tax  benefit on the exercise of employee stock options (See Note 6)     |       |              |       | 6,301               |       |                        |       |                                  |       |            |       |                   |       | 6,301                    |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  September 30, 2005                                      |       | 60,767            |       | $                   | 277,474    |                        | $          | —                                |       | $               | (8         | )                      | $          | (65                      | )          | $ | (81,793 | ) | $ | 195,608 |   |   |   |

 

See notes tocondensed consolidated financial statements.

 

5

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(Inthousands) (unaudited)**

 
| ** **                                                                                          | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,** | ** ** |
| ** **                                                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                               |       |                   |       |   |   |
| Net income                                                                                          |       | 25,208                 |       | 7,106 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                  |       |                   |       |   |   |
| Tax benefit on  the exercise of employee stock options                                              |       | 6,301                  |       | — |   |
| Deferred taxes                                                                                      |       | (43,688                | )          | — |   |
| Depreciation and  amortization                                                                      |       | 4,319                  |       | 939 |   |
| In-process  research and development                                                                |       | 5,640                  |       | — |   |
| Write-off of  deferred acquisition costs                                                            |       | —                 |       | 1,095 |   |
| Loss on disposal  of property and equipment                                                         |       | 48                     |       | 4 |   |
| Amortization of  deferred stock compensation                                                        |       | —                 |       | (27 | ) |
| Provision  (reversal) for inventory reserves                                                        |       | 337                    |       | (546 | ) |
| Provision for  doubtful accounts and sales returns                                                  |       | 58                     |       | — |   |
| Change in assets  and liabilities, net of Vidus acquisition:                                        |       |                   |       |   |   |
| Accounts  receivable                                                                                |       | (6,607                 | )          | 1,119 |   |
| Inventories                                                                                         |       | (2,312                 | )          | (822 | ) |
| Deferred product  costs                                                                             |       | (15,341                | )          | 932 |   |
| Prepaid expenses  and other                                                                         |       | (571                   | )          | (116 | ) |
| Accounts payable                                                                                    |       | 2,589                  |       | (1,130 | ) |
| Accrued and  other liabilities                                                                      |       | 657                    |       | (387 | ) |
| Deferred revenue  and customer deposits                                                             |       | 9,829                  |       | (565 | ) |
|                                                                                                |       |                   |       |   |   |
| Net cash (used in) provided by operating activities                                                 |       | (13,533                | )          | 7,602 |   |
|                                                                                                |       |                   |       |   |   |
| Cash flows from investing activities:                                                               |       |                   |       |   |   |
| Purchase of  property and equipment                                                                 |       | (3,101                 | )          | (879 | ) |
| Purchase of  short-term investments                                                                 |       | (75,341                | )          | (123,016 | ) |
| Proceeds from  the sale of short-term investments                                                   |       | 125,723                |       | 30,929 |   |
| Acquisition of  Vidus, net of cash acquired                                                         |       | (6,851                 | )          | — |   |
|                                                                                                |       |                   |       |   |   |
| Net cash provided by (used in) investing activities                                                 |       | 40,430                 |       | (92,966 | ) |
|                                                                                                |       |                   |       |   |   |
| Cash flows from financing activities:                                                               |       |                   |       |   |   |
| Proceeds from  sale of common stock                                                                 |       | 1,232                  |       | 2,457 |   |
| Proceeds from  payments on notes receivable issued to stockholders                                  |       | 3                      |       | 87 |   |
|                                                                                                |       |                   |       |   |   |
| Net cash provided by financing activities                                                           |       | 1,235                  |       | 2,544 |   |
|                                                                                                |       |                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                          |       | 28,132                 |       | (82,820 | ) |
| Cash and cash equivalents:                                                                          |       |                   |       |   |   |
| Beginning of  period                                                                                |       | 14,494                 |       | 103,669 |   |
|                                                                                                |       |                   |       |   |   |
| End of period                                                                                       |       | 42,626                 |       | 20,849 |   |
|                                                                                                |       |                   |       |   |   |
| Non-cash investing and financing activities:                                                        |       |                   |       |   |   |
| Issuance of  common stock, preferred stock and options in connection with the acquisition  of Vidus |       | 46,456                 |       | — |   |
| Dividends on  redeemable preferred stock                                                            |       | 305                    |       | — |   |
| Unrealized gain  (loss) on short-term investments                                                   |       | 114                    |       | (156 | ) |

 

See notes tocondensed consolidated financial statements.

 

6

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**@Road, Inc.**

**NotesTo Condensed Consolidated Financial Statements**

(unaudited)

 

**Note 1—Summary of Significant Accounting Policies**

 

*Basisof Consolidation and Presentation*

 

The accompanyingcondensed consolidated financial statements include @Road, Inc. and itswholly-owned subsidiaries (collectively, the “Company”). Intercompany accountsand transactions are eliminated upon consolidation.

 

The accompanyingcondensed consolidated financial statements were prepared by the Company, withoutan audit, pursuant to the rules and regulations of the Securities andExchange Commission (SEC). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughthe Company believes the disclosures made herein are adequate to make theinformation presented not misleading.

 

In the opinion ofmanagement, the financial statements include all adjustments (consisting onlyof normal recurring adjustments) necessary to fairly present the financialcondition, results of operations, and cash flows for the periods presented.Results of operations for the periods presented are not necessarily indicativeof results to be expected for any other interim period or for the full year.These condensed consolidated financial statements should be read in conjunctionwith the Company’s consolidated financial statements and notes thereto in its Form 10-Kfor the year ended December 31, 2004 (Commission File No. 000-31511),dated March 15, 2005 and filed with the SEC.

 

*Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses during the reporting period. On an on-going basis, theCompany evaluates its estimates, including those related to provisions fordoubtful accounts, legal and other contingencies, income taxes, goodwill andintangible assets. The Company bases its estimates on historical experience andon various other assumptions that are believed to be reasonable under thecircumstances. Actual results could differ from those estimates.

 

*CertainSignificant Risks and Uncertainties*

 

The Company participatesin a dynamic high-technology industry and believes that adverse changes in anyof the following areas could have a material adverse effect on its futurefinancial position, results of operations or cash flows: the ability of @Roadto integrate Vidus operations successfully; the ability of @Road to accelerateor continue to grow as a result of its investment initiatives; the ability of@Road and its alliances to market, sell and support @Road solutions; the timingof purchasing and implementation decisions by prospects and customers;competition; the dependence of @Road on mobile data systems technology, wirelessnetworks, network infrastructure and positioning systems owned and controlledby others; advances and trends in new technologies and industry standards;market acceptance of the Company’s existing or new solutions; development ofsales channels; changes in third-party manufacturers, key suppliers, certainstrategic or customer relationships; litigation or claims against the Companybased on intellectual property, product, regulatory or other factors; and theCompany’s ability to attract and retain employees necessary to support itsgrowth.

 

Motorola is the solesupplier of microcontrollers and certain modems used in the Company’s products.Micronet is the sole supplier of our Internet Data Terminal.  Everex is the sole supplier of our InternetLocation Manager - WiFi. The Company expects to rely on these suppliers as thesole source for these components and devices for the next several years.

 

*ForeignCurrency Transactions*

 

The functional currencyof the Company and its foreign subsidiaries is the U.S. dollar. Accordingly,all monetary assets and liabilities are translated at the current exchange rateat the end of the period, non-monetary assets and liabilities are translated athistorical rates and revenues and expenses are translated at average exchange ratesin effect during the period. Transaction gains and losses have not beensignificant to date and are included in *Otherincome, net.*

 

*Stock-BasedCompensation*

 

The Company accounts forstock-based employee compensation issued under compensatory plans using theintrinsic value method, 

 

7

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which calculates the compensationexpense based on the difference, if any, on the date of the grant, between thefair value of the Company’s stock and the option exercise price.

 

Accounting principlesgenerally accepted in the United States require companies who choose to accountfor stock option grants using the intrinsic value method to also determine thefair value of option grants using an option pricing model, such as theBlack-Scholes model, and to disclose the impact of fair value accounting in anote to the financial statements.

 

In December 2002,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 148,*Accounting for Stock-Based Compensation Transition and Disclosure, an Amendmentof SFAS No. 123* (SFAS 148). The Company did not elect tovoluntarily change to the fair value based method of accounting for stock basedemployee compensation and record such amounts as charges to operating expense.The impact of recognizing the fair value of option grants and stock grantsunder the Company’s employee stock purchase plan as an expense underSFAS 148 would have substantially reduced the Company’s operating results,as follows (in thousands, except per share amounts):

 
| ** **                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Net  income as reported                                                                                       |       | $                                          | 33,523     |                                      | $          | 2,930 |   | $ | 25,208 |   | $ | 7,106 |   |
| Add:  stock-based employee compensation expense included in reported net income,  net of tax effect           |       | —                                     |       | —                                    |       | — |   | 4 |   |
| Less:  stock-based employee compensation expense determined under fair value based  method, net of tax effect |       | 441                                        |       | (1,883                                    | )          | (4,038 | ) | (5,444 | ) |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Pro  forma net income                                                                                         |       | 33,964                                     |       | 1,047                                     |       | 21,170 |   | 1,666 |   |
| Preferred  stock dividends                                                                                    |       | (124                                       | )          | —                                    |       | (305 | ) | — |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Pro  forma net income attributable to common stockholders                                                     |       | $                                          | 33,840     |                                      | $          | 1,047 |   | $ | 20,865 |   | $ | 1,666 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Basic  net income per share:                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| As  reported                                                                                                  |       | $                                          | 0.55       |                                      | $          | 0.05 |   | $ | 0.42 |   | $ | 0.13 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Pro  forma                                                                                                    |       | $                                          | 0.56       |                                      | $          | 0.02 |   | $ | 0.35 |   | $ | 0.03 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Diluted  net income (loss) per share:                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| As  reported                                                                                                  |       | $                                          | 0.54       |                                      | $          | 0.05 |   | $ | 0.41 |   | $ | 0.12 |   |
|                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Pro  forma                                                                                                    |       | $                                          | 0.55       |                                      | $          | 0.02 |   | $ | 0.34 |   | $ | 0.03 |   |

 

On October 27, 2005,the Company accelerated the vesting of 811,110 stock options with exerciseprices ranging from $6.40 to $14.58, being priced above the closing stock priceon such date.  The Company will recognize pro forma compensation expenserelated to this acceleration of $5.0 million for the three months ended December 31,2005.  The accelerated vesting of thesestock options is expected to reduce the compensation expense associated withthese options in future periods resulting from the adoption of SFAS No. 123(revised 2004), *Share-Based Payment*.

 

The weighted average fairvalue of options granted in the three months ended September 30, 2005 and2004, were $1.69 and $2.75, respectively. The weighted average fair value ofoptions granted in the nine months ended September 30, 2005 and 2004, were$2.26 and $3.79, respectively. The Company calculated the fair value of eachoption award on the date of grant using the Black-Scholes option pricing model.The Company’s calculations are based on a single option valuation approach andforfeitures are recognized as they occur. The following weighted averageassumptions were used for each respective period:

 
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock Option Plans:**   |       |                                       |       |                                      |       |   |   |   |   |
| Risk  free interest rate  |       | 4.06                                       | %          | 3.47                                      | %          | 3.83 | % | 3.37 | % |
| Expected  volatility      |       | 77                                         | %          | 107                                       | %          | 86 | % | 106 | % |
| Expected  life (in years) |       | 2.49                                       |       | 5.00                                      |       | 3.27 |   | 5.00 |   |
| Expected  dividend        |       | $                                          | 0.00       |                                      | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                           |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

8

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| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Employee Stock Purchase Plan:** |       |                                       |       |                                      |       |   |   |   |   |
| Risk  free interest rate          |       | 3.14                                       | %          | 1.11                                      | %          | 2.78 | % | 1.06 | % |
| Expected  volatility              |       | 57                                         | %          | 63                                        | %          | 77 | % | 67 | % |
| Expected  life (in years)         |       | 0.5                                        |       | 0.5                                       |       | 0.5 |   | 0.5 |   |
| Expected  dividend                |       | $                                          | 0.00       |                                      | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                                   |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

The Company accounts forstock-based arrangements issued to non-employees using the fair value basedmethod, which calculates the compensation expense based on the fair value ofthe stock options granted using the Black-Scholes option pricing model at thedate of grant, or over the period of performance, as appropriate.

 

*RevenueRecognition*

 

The Company followsspecific and detailed guidelines in recognizing revenue in accordance with theprovisions of AICPA Statement of Position 97-2,*Software Revenue Recognition*, as amended by Statement of Position 98-4and Statement of Position 98-9, as well as Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts* andStatement of Position 81-1*, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.*The Company recognizes revenue when the price is fixed and determinable, uponpersuasive evidence of an agreement, when it has fulfilled its obligationsunder any such agreement and upon a determination that collectibility isprobable.

 

The Company’s revenuesare derived from two sources, hosted revenues and licensed revenues. Hostedrevenues are derived from monthly fees for its MRM solutions and upfront ormonthly fees for the hardware device enabling the MRM solution. Licensedrevenues are derived from providing license, installation, training and postcontract customer support services to end users.

 

Monthly fees for theCompany’s MRM hosted solutions are recognized ratably over the minimum contractperiod, which commences (a) upon installation where customers haveinstalled its proprietary hardware devices in mobile worker vehicles, or (b) uponthe creation of subscription licenses and a customer account on its websitewhere customers have elected to use its MRM solution with a location- orwireless application protocol- enabled mobile telephone. Upfront fees for theCompany’s MRM hosted solution primarily consist of amounts for the InternetLocation Manager, Internet Location Manager – WiFi, Internet Data Terminal or aruggedized personal digital assistant. The Company defers upfront fees atinstallation and recognizes them ratably over the minimum contract period,generally two or three years. Renewal rates for its MRM solution are notconsidered priced at a bargain in comparison to the upfront fees (as describedin Staff Accounting Bulletin No. 104, *RevenueRecognition*). Changes to the pricing of the upfront fees for theCompany’s MRM solutions in the future could result in the recognition ofupfront fees over periods that extend beyond the minimum contract period. Ifthe Company cannot objectively determine the fair value of any undeliveredelement included in hosted arrangements, it defers revenue until all elementsare delivered, all services have been performed or fair value can objectivelybe determined.

 

Historically, the feesfor the Company’s proprietary hardware devices have often been at or below itscosts. If the fees for the hardware devices are above its costs, such excess isamortized ratably over the minimum contract period. If the fees for thehardware devices are below its costs, such amount is expensed as cost of hostedrevenue at the time of shipment.

 

Licensed revenuesassociated with the fees for the license of the Company’s*taskforce* product and relatedcustomization and installation are generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, the Company determines progress to completion based on actual directlabor hours incurred to date as a percentage of the estimated total directlabor hours required to complete the project. The Company periodicallyevaluates the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, the Company has not incurred any such losses.Costs incurred in advance of billings are recorded as costs in excess ofrelated billings on uncompleted contracts. If the amount of revenue recognizedexceeds the amounts billed to customers, the excess amount is recorded asunbilled accounts receivable. If the amount billed exceeds the amount ofrevenue recognized, the excess amount is recorded as customer deposits. Revenuerecognized in any period is dependent on the Company’s progress towardcompletion of projects in progress. Significant management judgment anddiscretion are used to estimate total direct labor hours. Any changes in ordeviations from these estimates could have a material effect on the amount ofrevenue the Company recognizes in any period.

 

The Company derivespost-contract customer support fees from post-contract customer supportcontracts, which are generally initially purchased at the same time as alicense for its*taskforce*product. Post-contract customer support can include telephone and email supportand the right to receive unspecified upgrades on a when-and-if-available basis.Post-contract customer support may generally be renewed on an annual basis. TheCompany recognizes revenue for post-contract customer support, based on vendorspecific objective evidence of fair value, ratably over the term of thepost-contract customer support period. It generally determines vendor specificobjective evidence of post-contract customer support based on the stated feesfor post-contract customer support renewal set forth in the original licenseagreement. If the Company is unable to establish vendor specific objectiveevidence of fair value, it recognizes all fees ratably over the term of thepost-contract customer support, when the only undelivered element ispost-contract customer support.

 

9

----

 

For arrangements withmultiple elements, such as licenses and post-contract customer supportservices, the Company allocates revenue to each element of a transaction basedupon its fair value as determined in reliance on vendor specific objectiveevidence. Vendor specific objective evidence of fair value for all elements ofan arrangement is based upon the normal pricing and discounting practices whensold separately, and post-contract customer support services is additionallymeasured by the renewal rate. If the Company cannot objectively determine thefair value of any undelivered element included in license arrangements, itdefers revenue until all elements are delivered, all services have beenperformed or fair value can objectively be determined. When the fair value of alicense element has not been established, the Company uses the residual methodto record license revenue if the fair value of all undelivered elements isdeterminable. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the fee is allocated to thedelivered elements and recognized as revenue.

 

*Comprehensive(Loss) Income*

 

SFAS No. 130,*Reporting Comprehensive Income*, requiresthat an enterprise report, by major components and as a single total, thechange in its net assets during the period from non-owner sources. Accumulated other comprehensive loss was comprised of unrealized losses of$65,000 and $179,000 on short-term investments at September 30, 2005 and December 31,2004, respectively.

 

*Goodwilland intangible assets*

 

Goodwill represents theexcess of the purchase price over the fair value of the net tangible andidentifiable intangible assets acquired in a business combination. Intangibleassets resulting from the acquisitions of entities accounted for using thepurchase method of accounting are estimated by management based on the fairvalue of assets received. Identifiable intangible assets are comprised of coredeveloped technology, order backlog, customer relationships, trademarks andtrade names, and other intangible assets. Identifiable intangible assets thathave finite useful lives are being amortized over their useful lives of tenyears for core developed technology, three years for order backlog and tenyears for customer relationships. Trademarks and trade names have indefinite livesand as such are not amortized but are tested at least annually forimpairment.  The fair value assigned to in-process research and development and otheridentifiable intangible assets was estimated by discounting to present valuethe cash flows attributable to the technology once it had reached technologicalfeasibility.  The Company follows the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*,under which goodwill is no longer subject to amortization. Rather, goodwill issubject to at least an annual assessment for impairment, applying a fair-valuebased test.

 

*Long-livedassets and goodwill*

 

The Company evaluateslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inaccordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*. Anasset is considered impaired if its carrying amount exceeds the future netundiscounted cash flow that the asset is expected to generate. If an asset isconsidered to be impaired, the amount of impairment to be recognized ismeasured by the amount by which the carrying amount of the asset exceeds itsfair market value. The Company assesses the recoverability of long-lived andintangible assets by determining whether the unamortized balances can berecovered through undiscounted future net cash flows of the related assets. Theamount of impairment, if any, is measured based on projected discounted futurenet cash flows.

 

The Company evaluatesgoodwill, at a minimum, on an annual basis and whenever events and changes incircumstances suggest that the carrying amount may not be recoverable.Impairment of goodwill is tested at the reporting unit level by comparing thereporting unit’s carrying amount, including goodwill, to the fair value of thereporting unit. The fair values of the reporting units are estimated using acombination of the income, or discounted cash flows, approach and the marketapproach, which utilizes comparable companies’ data. If the carrying amount ofthe reporting unit exceeds its fair value, goodwill is considered impaired anda second step is performed to measure the amount of impairment loss, if any.The Company conducted its initial annual impairment test as of August 31,2005 and determined there was no impairment. There were no events orcircumstances from that date through September 30, 2005 indicating that afurther assessment was necessary.

 

*RecentlyIssued Accounting Pronouncements*

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004),*Share-Based Payment* (SFAS 123R), that addresses the accountingfor share-based payment transactions in which an enterprise receives employeeservices in exchange for either equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.

 

The statement eliminatesthe ability to account for share-based compensation transactions using theintrinsic value method as prescribed by Accounting Principles Board (APB)Opinion No. 25,*Accounting for StockIssued to Employees*, and generally requires that such transactionsbe accounted for using a fair value based method and recognized as expenses inthe consolidated statement of operations. The statement requires companies toassess the most appropriate model to calculate the value of the options. TheCompany 

 

10

----

 

currently uses theBlack-Scholes option pricing model to value options and is assessing whichmodel it may use upon adoption of such standard. The use of an alternativemodel to value options may result in a different fair value than the use of theBlack-Scholes option pricing model.

 

There are a number of otherrequirements under the new standard that will result in a different accountingtreatment than that currently required. These differences include, but are notlimited to, the accounting for the tax benefit on employee stock options andfor stock issued under the Company’s employee stock purchase plan.

 

The Company will also berequired to determine the transition method to be used at date of adoption. Theallowed transition methods include modified prospective and modifiedretroactive adoption alternatives. Under the modified retroactive method, priorperiods may be restated either as of the beginning of the year of adoption orfor all periods presented. This method would record compensation expense forall unvested stock options and restricted stock beginning with the first periodrestated. The modified prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R. In April 2005, the SECdeferred the effective date of SFAS 123R. The effective date of SFAS 123Rfor the Company’s consolidated financial statements is January 1, 2006.

 

While the Company has notcompleted its assessment of the impact of SFAS 123R, it expects that thisstatement will have a significant impact on the Company’s consolidatedfinancial statements as the Company will be required to expense the fair valueof its stock option grants and stock purchases under its employee stockpurchase plans rather than disclose the impact on its consolidated net (loss)income attributable to common stockholders within its footnotes, as is itscurrent practice.

 

In November 2004,the FASB issued SFAS No. 151, *Inventory Costs, anamendment of APB No. 43, Chapter 4* (SFAS 151). SFAS 151 clarifiesthat abnormal inventory costs such as the costs of idle facilities, excessfreight and handling costs, and wasted materials (spoilage) are required to berecognized as current period charges. The provisions of SFAS 151 are effectivefor fiscal years beginning after July 1, 2005. The Company does not expectthat the adoption of SFAS 151, which the Company will implement beginning on January 1,2006, will have a material impact on its consolidated statement of operationsand financial condition.

 

On June 7, 2005, theFASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3, Reporting Accounting Changes inInterim Financial Statements* (SFAS 154). SFAS 154 changes therequirements for the accounting for, and reporting of, a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired to be recognized by way of a cumulative effect adjustment within netincome during the period of the change. SFAS 154 requires retrospectiveapplication to prior periods’ financial statements, unless it is impracticableto determine either the period-specific effects or the cumulative effect of thechange. SFAS 154 is effective for accounting changes made in fiscal yearsbeginning after December 15, 2005; however, the Statement does not changethe transition provisions of any existing accounting pronouncements.

 

**Note 2 —Basic and Diluted Net Income per Share**

 

Basic net income pershare is computed by dividing the net income attributable to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period. Diluted net income per share is computed by dividingthe net income attributable to common stockholders for the period by theweighted average number of common shares and potentially dilutive common sharesoutstanding during the period. Potentially dilutive common shares, composed ofunvested restricted common stock and incremental common shares issuable uponthe exercise of stock options, are included in diluted net income pershare (using the treasury stock method) to the extent such shares are dilutive.Potentially dilutive shares that are anti-dilutive, as calculated based on theweighted average closing price of the Company’s common stock for the period,are excluded from the calculation of diluted net income per share. Commonshare equivalents are excluded from the computation in loss periods, as theireffect would be anti-dilutive.

 

The following table setsforth the computation of basic and diluted net income per share for the periodsindicated (in thousands, except per share amount):

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Net  income attributable to common stockholders (numerator)       |       | $                                          | 33,399     |                                      | $          | 2,930 |   | $ | 24,903 |   | $ | 7,106 |   |
| Shares  (denominator):                                            |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  average common shares outstanding                       |       | 60,740                                     |       | 54,498                                    |       | 59,571 |   | 54,161 |   |
| Weighted  average common shares outstanding subject to repurchase |       | —                                     |       | —                                    |       | — |   | (5 | ) |
|                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Shares  used in computation                                       |       | 60,740                                     |       | 54,498                                    |       | 59,571 |   | 54,156 |   |
| Diluted                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Dilution  impact from option equivalent shares                    |       | 1,350                                      |       | 1,663                                     |       | 1,399 |   | 3,233 |   |
| Dilution  impact from employee stock purchase plan                |       | 43                                         |       | 38                                        |       | 24 |   | 30 |   |
| Add  back weighted average common shares subject to repurchase    |       | —                                     |       | —                                    |       | — |   | 5 |   |
|                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Shares  used in computation                                       |       | 62,133                                     |       | 56,199                                    |       | 60,994 |   | 57,424 |   |
|                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Net  income per share                                             |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                             |       | $                                          | 0.55       |                                      | $          | 0.05 |   | $ | 0.42 |   | $ | 0.13 |   |
| Diluted                                                           |       | $                                          | 0.54       |                                      | $          | 0.05 |   | $ | 0.41 |   | $ | 0.12 |   |

 

11

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Employee stock options topurchase approximately 5.1 million shares with a weighted average exerciseprice of $6.81 and approximately 3.9 million shares with a weighted averageexercise price of $8.10 for the three months ended September 30, 2005 and2004, respectively, were outstanding, but were not included in the computationof diluted earnings per share because their effect would have beenanti-dilutive.  Employee stock options topurchase approximately 4.9 million shares with a weighted average exerciseprice of $7.05 and approximately 1.7 million shares with a weighted averageexercise price of $11.11 for the nine months ended September 30, 2005 and2004, respectively, were outstanding, but were not included in the computationof diluted earnings per share because their effect would have beenanti-dilutive.

 

**Note 3 —Acquisition of Vidus**

 

On February 18,2005, the Company completed the acquisition of Vidus Limited (“Vidus”) in atransaction accounted for as a business combination using the purchase method.As consideration for the acquisition, the Company issued approximately 5.5million shares of its common stock valued at $38.2 million, newly createdredeemable preferred stock (“preferred stock”) in face amount of approximately$7.7 million, extinguished for cash existing debt of approximately $5.5 millionin exchange for all of the outstanding shares of Vidus capital stock, andissued approximately 146,000 vested options with a fair value of $531,000.Under the terms of the stock option grants, each option has been classified asa non-qualified stock option, is fully vested, has an exercise price rangingfrom $0.67 to $2.00 per share and has a one-year term. The Company incurredacquisition related costs of $2.6 million, of which $478,000 was allocated tothe issuance of common stock. The purchase price of approximately$54.6 million was preliminarily allocated among the tangible andidentifiable intangible assets acquired and liabilities assumed on the basis oftheir estimated fair values on the acquisition date.

 

The total estimatedconsideration is subject to an adjustment if the average closing price of theCompany’s common stock for any ten consecutive trading days during the 12 monthperiod ending September 25, 2006 does not meet at least an average priceper share of $7.00. The fair value of the Company’s common stock was derivedfrom this guaranteed market price per share of $7.00.  The fair value ofthe stock options was determined using the Black-Scholes option pricing modelwith the following assumptions: no dividend yield, expected volatility of 96%,expected life of one year and a risk-free interest rate of 3.09%.

 

The Vidus acquisition wasaccounted for under SFAS No. 141,*Business Combinations* (SFAS 141) and certain specified provisions ofSFAS No. 142,*Goodwill and OtherIntangible Assets* (SFAS 142).  The results of operations ofVidus were included in the Company’s Condensed Consolidated Statement ofOperations from February 19, 2005.

 

The following tablesummarizes the estimated fair values of the tangible assets acquired and theliabilities assumed at the date of acquisition (in thousands):

 
| Cash                                |   | $      | 1,269  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts  receivable                |   | 1,669  |   |
| Prepaid  expenses and other         |   | 412    |   |
| Property  and equipment             |   | 1,022  |   |
| Notes  receivable from stockholder  |   | 11     |   |
|                                |   |   |   |
| Total  tangible assets acquired     |   | 4,383  |   |
|                                |   |   |   |
| Accounts  payable                   |   | (540   | )      |
| Accrued  liabilities                |   | (2,148 | )      |
| Deferred  revenue                   |   | (4,270 | )      |
|                                |   |   |   |
| Total  tangible liabilities assumed |   | (6,958 | )      |
|                                |   |   |   |
| Net  tangible liabilities assumed   |   | $      | (2,575 | )      |

 

12

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Under the purchase methodof accounting, the Company allocated the total purchase price to the acquirednet tangible and intangible assets based upon their estimated fair market valueas of the date of acquisition, February 18, 2005. The intangible assetsrecognized, apart from goodwill, represented contractual or other legal rightsof Vidus and those intangible assets of Vidus that could be clearly identified.These intangible assets were identified and valued through interviews andanalysis of data provided by Vidus concerning development projects, their stageof development, the time and resources needed to complete them and, ifapplicable, their expected income generating ability. There were no othercontractual or other legal rights of Vidus clearly identifiable by management,other than those identified below. The preliminary allocation of the purchaseprice to the tangible and identifiable intangible assets acquired andliabilities assumed was as follows (in thousands):

 
| Fair  value of net tangible liabilities assumed |   | $      | (2,575 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| Intangible  assets acquired:                    |   |   |   |
| Core  developed technology                      |   | 18,410 |   |
| Order  backlog                                  |   | 5,500  |   |
| Customer  relationships                         |   | 3,660  |   |
| Trademarks  and trade names                     |   | 5,520  |   |
|                                            |   |   |   |
|                                            |   | 33,090 |   |
|                                            |   |   |   |
| In-process  research and development            |   | 5,640  |   |
| Costs  allocated to common stock issued         |   | 478    |   |
| Deferred  tax liability, net                    |   | (3,107 | )      |
| Goodwill                                        |   | 21,062 |   |
|                                            |   |   |   |
| Purchase  price                                 |   | $      | 54,588 |   |

 

*Coredeveloped technology*. Core developed technology ofapproximately $18.4 million relates to the Vidus*taskforce* technology. At the date of acquisition, the developedtechnology was complete and had reached technological feasibility. Any costs tobe incurred in the future will relate to the ongoing maintenance of thedeveloped technology and will be expensed as incurred. To estimate the fairvalue of the developed technology, an income approach was used with a discountrate of 35%, which included an analysis of future cash flows and the risksassociated with achieving such cash flows. The developed technology is beingamortized over its estimated useful life of ten years.

 

*Orderbacklog and Customer relationships.* The Order backlog ofapproximately $5.5 million and the Customer relationships of approximately $3.7million represented the fair value of the post-contract customer supportobligations and existing customer relationships. To estimate the fair value ofthe Order Backlog and the Customer relationships, an income approach was usedwith a discount rate of 30%. The order backlog and Customer relationships areamortized over their estimated useful lives of three years for Order backlogand ten years for Customer relationships.

 

*Trademarksand trade names.* Vidus and its product name,*taskforce*, have strong name recognitionin European field service management, telecommunications, cable, and utilitiesmarkets. To estimate the fair value of the trademarks and trade names, anincome approach was used with a discount rate of 40%. The Company expects tocontinue to produce and market the*taskforce*product and utilize the Vidus trade name in Europe. Therefore, an analysis ofvarious economic factors indicated there was no limit to the period of time thetrademark and trade names would contribute to future cash flows. Because cashflow is expected to continue indefinitely, the trademark and trade names arenot being amortized, but tested for impairment annually and whenever eventsindicate that an impairment may have occurred.

 

*In-processresearch and development.* Development projects that hadreached technological feasibility were classified as developed technology, andthe value assigned to developed technology was capitalized. In-process researchand development of approximately $5.6 million reflected research projects thathad not reached technological feasibility or had no alternative future use atthe time of the acquisition and was immediately expensed. In order to achievetechnological feasibility, the Company estimated the hours required to completethe projects to cost approximately $5.7 million. The Company estimated the fairvalue assigned to in-process research and development using the incomeapproach, which discounts to present value the cash flows attributable to thetechnology once it had reached technological feasibility using a discount rateof 40%. The stages of completion were determined by estimating the costs andtime incurred to date relative to the costs and time expected to be incurred todevelop the in-process technology into a commercially viable technology orproduct, while considering the relative difficulty of completing the varioustasks and overcoming the obstacles necessary to attain technologicalfeasibility. The weighted average stage of completion for all projects, in theaggregate, was approximately 80% as of the acquisition date. Cash flows fromsales of products incorporating those technologies commenced in fiscal 2005.

 

13

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*Goodwill.* Goodwillof approximately $21.1 million represented the excess of the purchase priceover the fair value of the net tangible and intangible assets acquired. The acquisitionallows the Company to integrate its technology with Vidus’ technology fordynamic scheduling, dispatching, routing and appointment booking of mobileworkers, cross-sell the companies’ solutions and further develop the combinedtechnologies to provide customers with seamlessly integrated solutions. Theacquisition also creates the ability to expand the Company’s business to Europeand other international markets. These opportunities, along with the ability tohire the Vidus workforce, were significant contributing factors to theestablishment of the purchase price, resulting in the recognition of asignificant amount of goodwill. In accordance with SFAS 142, the Company is notamortizing goodwill. The Company will carry the goodwill at cost and test itfor impairment annually and whenever events indicate that an impairment mayhave occurred. The goodwill and intangible assets were allocated to thelicensed reporting segment.  The goodwill is not deductible for taxpurposes.

 

The results of operationsof Vidus are included in the Company’s Consolidated Statement of Operationsfrom the date of the acquisition. If the Company had acquired Vidus at thebeginning of the periods presented, the Company’s unaudited pro forma revenue,net income (loss), net income (loss) attributable to common stockholders andnet income (loss) per share would have been as follows (in thousands, exceptper share amount):

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Revenue                                                         |       | $                                          | 24,969     |                                      | $          | 19,755 |   | $ | 66,280 |   | $ | 60,337 |   |
| Net  income (loss)                                              |       | 33,523                                     |       | (2,004                                    | )          | 22,523 |   | (4,863 | ) |
| Net  income (loss) attributable to common stockholders          |       | 33,399                                     |       | (2,128                                    | )          | 22,149 |   | (5,239 | ) |
| Net  income (loss) per share (basic)                            |       | 0.55                                       |       | (0.04                                     | )          | 0.37 |   | (0.09 | ) |
| Net  income (loss) per share (diluted)                          |       | 0.54                                       |       | (0.04                                     | )          | 0.36 |   | (0.09 | ) |
| Shares  used in computing net income (loss) per share (basic)   |       | 60,740                                     |       | 59,952                                    |       | 60,530 |   | 59,610 |   |
| Shares  used in computing net income (loss) per share (diluted) |       | 62,133                                     |       | 59,952                                    |       | 61,953 |   | 59,610 |   |
|                                                                 |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

These results are notnecessarily indicative of what the actual results of operations would have beenif the acquisition of Vidus had in fact occurred on the dates or for theperiods indicated, nor do they purport to project the results of operations forany future periods or as of any date. These results do not give effect to anycost savings, operating synergies, and revenue enhancements which may resultfrom the acquisition of Vidus or the costs of achieving these cost savings,operating synergies, and revenue enhancements.  The in-process researchand development charge of approximately $5.6 million is included in the netloss attributable to common stockholders for the nine months ended September 30,2005 and excluded for the three months ended September 30, 2005 and threeand nine months ended September 30, 2004.

 

**Note 4 —Intangible Assets**

 

SFAS 142 requirespurchased intangible assets other than goodwill to be amortized over theirexpected useful lives unless these lives are determined to be indefinite.Purchased intangible assets are carried at cost less accumulated amortization.Amortization is computed over the estimated useful lives of the respectiveassets.

 

Intangible assets were asfollows (in thousands):

 
| ** **                      | ** ** | **As of September 30, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**              | ** ** | **Accumulated  Depreciation**    | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
| Amortized  intangible assets:   |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Core  developed technology      |       | $                                 | 23,462     |                             | $          | (6,181 | ) | $ | 17,281 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |
| Order  backlog                  |       | 5,500                             |       | (1,124                           | )          | 4,376 |   | — |   | — |   | — |   |
| Customer  relationships         |       | 3,660                             |       | (224                             | )          | 3,436 |   | — |   | — |   | — |   |
|                            |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Total                           |       | 32,622                            |       | (7,529                           | )          | 25,093 |   | 5,052 |   | (5,052 | ) | — |   |
|                            |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets: |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Trademarks  and trade names     |       | 5,520                             |       | —                           |       | 5,520 |   | — |   | — |   | — |   |
|                            |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Total  intangible assets        |       | $                                 | 38,142     |                             | $          | (7,529 | ) | $ | 30,613 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |

 

14

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For the three monthsended September 30, 2005 and 2004, amortization of intangible assets was$1.0 million and $7,000, respectively, and for the nine months ended September 30,2005 and 2004, amortization of intangible assets was $2.5 million and $28,000,respectively. The estimated future amortization expense of purchased intangibleassets as of September 30, 2005 is as follows (in thousands):

 
| Remainder  of 2005 |   | $      | 1,010  |   |
|--------------------|--------|--------|--------|--------|
| 2006               |   | 4,040  |   |
| 2007               |   | 4,041  |   |
| 2008               |   | 2,458  |   |
| 2009               |   | 2,207  |   |
| Thereafter         |   | 11,337 |   |
|               |   |   |   |
| Total              |   | $      | 25,093 |   |

 

**Note 5 —Short-Term Investments**

 

Short-term investmentsincluded the following available-for-sale securities at September 30, 2005and December 31, 2004 (in thousands):

 
| ** **                       | ** ** | **September 30, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**         | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S.  Government debt securities |       | $                           | 42,465     |   | $ | — |   | $ | (63 | ) | $ | 42,402 |   |
| Municipal  debt securities       |       | 6,849                       |       | 2 |   | (3 | ) | 6,848 |   |
| Corporate  debt securities       |       | 3,705                       |       | — |   | (1 | ) | 3,704 |   |
|                             |       |                        |       |   |   |   |   |   |   |
| Total                            |       | $                           | 53,019     |   | $ | 2 |   | $ | (67 | ) | $ | 52,954 |   |

 
| ** **                       | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**        | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
|                             |       |                       |       |   |   |   |   |   |   |
| U.S.  Government debt securities |       | $                          | 51,782     |   | $ | — |   | $ | (124 | ) | $ | 51,658 |   |
| Municipal  debt securities       |       | 31,354                     |       | 2 |   | (4 | ) | 31,352 |   |
| Corporate  debt securities       |       | 20,265                     |       | — |   | (53 | ) | 20,212 |   |
|                             |       |                       |       |   |   |   |   |   |   |
| Total                            |       | $                          | 103,401    |   | $ | 2 |   | $ | (181 | ) | $ | 103,222 |   |

 

**Note 6 – Income Taxes**

 

For the three and ninemonths ended September 30, 2005 the Company recorded an income tax benefitof $34.2 million and $37.4, respectively. Each of these periods reflectsthe reversal of a valuation allowance in the amount of $41.3 millionresulting from the Company's determination that it is more likely than not thatsuch future tax benefits will be realized as a result of current and estimatedfuture taxable income. Of this valuation allowance reversal, approximately $6.3million represented tax benefits generated as a result of the exercise ofemployee stock options and was accordingly recorded as a contribution to commonstock.  The deferred tax liability of$683,000 consists of deferred tax liabilities in the United Kingdom relating tointangible assets.

 

**Note 7 —Balance Sheet Components**

 

Inventories consist ofraw materials, work in process and finished goods, and are stated at the lowerof cost (average cost) or fair market value and consisted of (in thousands):

 
| ** **       | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw  materials   |       | $                            | 920        |                        | $          | 1,025 |   |
| Work  in process |       | 2,655                        |       | 746                         |       |
| Finished  goods  |       | 1,993                        |       | 1,822                       |       |
|             |       |                         |       |                        |       |
| Total            |       | $                            | 5,568      |                        | $          | 3,593 |   |

 

15

----

 

Property and equipment,net consisted of (in thousands):

 
| ** **                                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Computers  and software                    |       | $                            | 16,168     |                        | $          | 13,196 |   |
| Manufacturing  and office equipment        |       | 700                          |       | 352                         |       |
| Furniture  and fixtures                    |       | 474                          |       | 494                         |       |
| Leasehold  improvements                    |       | 693                          |       | 307                         |       |
|                                       |       |                         |       |                        |       |
| Total                                      |       | $                            | 18,035     |                        | $          | 14,349 |   |
| Accumulated  depreciation and amortization |       | (12,134                      | )          | (10,681                     | )          |
|                                       |       |                         |       |                        |       |
| Property  and equipment, net               |       | $                            | 5,901      |                        | $          | 3,668 |   |

 

 

Accrued liabilitiesconsisted of (in thousands):

 
| ** **                                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued  operating expenses                |       | $                            | 4,580      |                        | $          | 2,278 |   |
| Accrued  compensation and related benefits |       | 3,096                        |       | 2,855                       |       |
| Accrued  installation charges              |       | 185                          |       | 396                         |       |
|                                       |       |                         |       |                        |       |
| Total                                      |       | $                            | 7,861      |                        | $          | 5,529 |   |

 

**Note 8 —Redeemable Preferred Stock**

 

On February 18,2005, the Board of Directors of the Company authorized the creation of fourseries of preferred stock and designated approximately 44,000, 44,000, 5,000,and 5,000 shares as Series A-1, A-2, B-1, and B-2 preferred stock,respectively, of which approximately 24,000, 44,000, 5,000, and 5,000 shares ofSeries A-1, A-2, B-1, and B-2 preferred stock, respectively, were issuedand outstanding as of September 30, 2005.

 

*Dividends*

 

The holders of the Series A-1,A-2, B-1, and B-2 preferred stock are entitled to receive dividends at the rateof $6.50 per share annually.  The dividends accrue day to day, whether ornot earned or declared, from February 18, 2005. The dividends are payablewhen and if declared by the Board of Directors. Any accumulation of unpaiddividends on the preferred stock does not bear interest.

 

*Redemption*

 

The holders of the Series A-1and B-1 preferred stock may elect to redeem all or a portion of the shares onor after February 18, 2006, and the holders of the Series A-2 and B-2preferred stock may elect to redeem all or a portion of the shares on or after February 18,2007.

 

Each share of Series A-1and A-2 preferred stock is redeemable for an amount equal to (i) $100 plus(ii) all declared or accumulated but unpaid dividends. Each share of Series B-1and B-2 preferred stock is redeemable for an amount equal to (i) $100,plus (ii) all declared or accumulated but unpaid dividends, plus (iii) additionalconsideration if the Company’s common stock’s average closing sales price pershare is not at least $7.00 for any 10 consecutive trading day period during aone year period ending September 25, 2006.

 

On or after February 18,2009, the Company may redeem all or any portion of the Series A-1, A-2, B-1,and B-2 preferred stock.

 

*Liquidation*

 

Series A-1, A-2, B-1,and B-2 preferred stockholders are entitled to receive, upon liquidation, anamount equal to their respective redemption price. The holders of the Series A-1,A-2, B-1, and B-2 preferred stock rank on a pari passu basis as to the receiptof such distributions and in preference to the holders of common stock.

 

*Voting*

 

Each outstanding share ofpreferred stock is entitled to eleven (11) votes on all matters, votingwith the shares of common stock as a class.

 

16

----

 

The following table illustrates the activity for each series ofpreferred stock through September 30, 2005 (in thousands):

 
| ** **                                                                         | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-----------|------------|
| **Issued**                                                                         |       | $                   | 2,352      |                | $          | 4,424               |       | $                   | 486        |      | $          | 486 |   | $ | 7,748 |   |
| Amounts  accrued for dividends for the three months ending June 30, 2005      |       | 54                  |       | 103                 |       | 12                  |       | 12                  |       | 181       |       |
|                                                                               |       |                |       |                |       |                |       |                |       |      |       |
| Balance,  June 30, 2005                                                       |       | 2,406               |       | 4,527               |       | 498                 |       | 498                 |       | 7,929     |       |
| Amounts  accrued for dividends for the three months ending September 30, 2005 |       | 37                  |       | 71                  |       | 8                   |       | 8                   |       | 124       |       |
|                                                                               |       |                |       |                |       |                |       |                |       |      |       |
| Balance,  September 30, 2005                                                  |       | $                   | 2,443      |                | $          | 4,598               |       | $                   | 506        |      | $          | 506 |   | $ | 8,053 |   |

 

**Note 9 —Segment Reporting**

 

Reportable segments arebased upon the Company’s internal organization structure, the manner in whichthe operations are managed, the criteria used by the Company’s chief operatingdecision-maker to evaluate segment performance, the availability of separatefinancial information and overall materiality considerations.  The Company’s chief operating decision-makeris the CEO.

 

Effective with theacquisition of Vidus, the Company reports the results of its operations in twosegments: Hosted and Licensed. The segments are managed separately because eachoffers different products and serves different markets. The Hosted segmentprovides MRM solutions that provide location, reporting, dispatch, messaging,and other management services. The Licensed segment provides customers with theCompany’s*taskforce* productoffering, a field service automation software solution which is designed toenable a predictable and reliable customer experience from commitment toservice fulfillment; and to help synchronize the call center and field serviceoperations.

 

Hosted revenues arederived from monthly fees for the Company’s MRM solution and monthly or upfrontfees for the hardware device enabling the MRM solution. Licensed revenues arederived from license fees, installation fees and training and post contractcustomer support services to end users.

 

Information aboutoperations by reporting segment is as follows (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **Hosted**                                | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net  revenue from external customers       |       | $                                         | 18,965     |   | $ | 6,004 |   | $ | 24,969 |   | $ | 19,102 |   | $ | — |   | $ | 19,102 |   |
| Cost  of revenue                           |       | 10,238                                    |       | 1,481 |   | 11,719 |   | 8,582 |   | — |   | 8,582 |   |
| Intangibles  amortization                  |       | —                                    |       | 1,010 |   | 1,010 |   | 7 |   | — |   | 7 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                              |       | 8,727                                     |       | 3,513 |   | 12,240 |   | 10,513 |   | — |   | 10,513 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Gross  margin percentage                   |       | 46                                        | %          | 59 | % | 49 | % | 55 | % | — | % | 55 | % |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| (Loss)  income before income taxes         |       | (568                                      | )          | (101 | ) | (669 | ) | 2,930 |   | — |   | 2,930 |   |
| Benefit  from (provision for) income taxes |       | 34,963                                    |       | (771 | )  | 34,192 |   | — |   | — |   |   |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                         |       | $                                         | 34,395     |   | $ | (872 | ) | $ | 33,523 |   | $ | 2,930 |   | $ | — |   | $ | 2,930 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | $                                         | 503        |   | $ | 192 |   | $ | 695 |   | $ | 316 |   | $ | — |   | $ | 316 |   |
|                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

----

 
| ** **                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **Hosted**                               | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  revenue from external customers   |       | $                                        | 58,140     |   | $ | 7,447 |   | $ | 65,587 |   | $ | 55,325 |   | $ | — |   | $ | 55,325 |   |
| Cost  of revenue                       |       | 28,989                                   |       | 3,654 |   | 32,643 |   | 25,619 |   | — |   | 25,619 |   |
| Intangibles  amortization              |       | —                                   |       | 2,477 |   | 2,477 |   | 28 |   | — |   | 28 |   |
|                                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                          |       | 29,151                                   |       | 1,316 |   | 30,467 |   | 29,678 |   | — |   | 29,678 |   |
|                                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Gross  margin percentage               |       | 50                                       | %          | 18 | % | 46 | % | 54 | % | — | % | 54 | % |
|                                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss) before income taxes |       | 1,701                                    |       | (13,880 | ) | (12,179 | ) | 7,106 |   | — |   | 7,106 |   |
| Benefit  from income taxes             |       | 34,963                                   |       | 2,424 |   | 37,387 |   | — |   | — |   | — |   |
|                                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                     |       | $                                        | 36,664     |   | $ | (11,456 | ) | $ | 25,208 |   | $ | 7,106 |   | $ | — |   | $ | 7,106 |   |
|                                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                           |       | $                                        | 1,446      |   | $ | 397 |   | $ | 1,843 |   | $ | 911 |   | $ | — |   | $ | 911 |   |

 

Revenues are attributedto countries based on the location of the customer.  The distribution ofrevenue by geographic area was summarized as follows (in thousands):

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue from Unaffiliated Customers:** |       |                                       |       |                                      |       |   |   |   |   |
| United  States and Canada                |       | $                                          | 19,240     |                                      | $          | 19,102 |   | $ | 58,415 |   | $ | 55,325 |   |
| Europe                                   |       | 5,729                                      |       | —                                    |       | 7,172 |   | — |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
|                                     |       | $                                          | 24,969     |                                      | $          | 19,102 |   | $ | 65,587 |   | $ | 55,325 |   |

 

Long-lived assets areallocated among geographies based upon the country in which the long-livedasset is located or owned.  The distribution of long-lived assets bygeographic area was summarized as follows (in thousands):

 

| ** **                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **Long-Lived Assets, Net:** |       |                   |       |                  |       |
| United  States              |       | $                      | 58,139     |                  | $          | 10,039 |   |
| United  Kingdom             |       | 52,692                 |       | —                |       |
| India                       |       | 309                    |       | 256                   |       |
|                        |       |                   |       |                  |       |
|                        |       | $                      | 111,140    |                  | $          | 10,295 |   |

 

**Note 10— Commitments and Contingencies**

 

*LeaseCommitments*

 

The following tablerepresents the future minimum lease payments under non-cancelable operatingleases as of September 30, 2005 (in thousands):

 
| Remainder  of 2005            |   | $      | 454    |   |
|-------------------------------|--------|--------|--------|--------|
| 2006                          |   | 1,303  |   |
| 2007                          |   | 1,281  |   |
| 2008                          |   | 1,232  |   |
| 2009                          |   | 1,110  |   |
| Thereafter                    |   | 476    |   |
|                          |   |   |   |
| Total  minimum lease payments |   | $      | 5,856  |   |

 

The Company recognizesrent expense on a straight-line basis over the lease period and has accrued forrent expense incurred but not paid. Rent expense was approximately $598,000 and$332,000 for the three months ended September 30, 2005 and 2004,respectively, and approximately $1.9 million and $995,000 for the nine monthsended September 30, 2005 and 2004, respectively.

 

18

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*Contingencies*

 

It is expected thatVerizon Wireless will cease operating its CDPD network at the end of 2005. TheCompany is in discussions with Verizon Wireless to minimize any disruption tothe delivery of its services to @Road customers. The Company has notifiedcustomers comprising substantially all of the subscribers whose service wouldbe affected by the proposed termination of this CDPD network. At September 30,2005, approximately 3,500 of the Company’s core subscribers have yet tocomplete negotiations with the Company for their migration plans from this CDPDnetwork.  Additionally, at September 30,2005, Verizon Communications, which represents approximately 16,000 additionalsubscribers, has yet to determine its migration plans from the CDPD network.

 

To use an alternatenetwork, existing hardware devices would have to be replaced for subscriberscurrently using a CDPD network. While the Company does not anticipate losses onthe sale of these replacement hardware devices, if it is unable to migratethese customers in a timely fashion, the Company may offer price concessions.If the Company were to offer such concessions, they could have a materialadverse impact on the Company’s financial results.

 

*LegalProceedings*

 

From time to time, theCompany is subject to claims in legal proceedings arising in the normal courseof business. Based on its evaluation of these matters, the Company believesthat these matters will not have a material effect on the results of operationsor financial position of the Company.

 

*OtherContingencies*

 

The Company from time totime enters into certain types of agreements that contingently require it toindemnify parties against third party claims. These agreements primarily relateto: (i) certain agreements with the Company’s officers, directors andemployees and third parties, under which the Company may be required toindemnify such persons for liabilities arising out of their duties to theCompany and (ii) certain agreements under which the Company indemnifiescustomers and other third parties for claims such as those arising fromintellectual property infringement, personal injury, or non-performance underthe agreement. Such indemnification provisions are accounted for in accordancewith SFAS No. 5,*Accounting for Contingencies*.To date, the Company has not incurred any costs related to any claims undersuch indemnification provisions.

 

The terms of suchobligations vary. Because the amounts of the obligation in these types ofagreements often are not explicitly stated, the overall maximum amount of theobligations cannot be reasonably estimated. Historically, the Company has notbeen obligated to make any payments for these obligations, and no liabilitieshave been recorded for these obligations on the Company’s balance sheet as of September 30,2005.

 

In general, the Companyprovides its customers a 12-month limited warranty that the hardware furnishedunder the agreement will be free from defects in materials and workmanship andwill substantially conform to the specifications for such hardware. The Company’spolicy is to expense such costs as incurred. To date, the Company has incurredminimal costs related to this limited warranty obligation.

 

The Company also providesits European customers with a European Union statutory warranty of 90 days. Ifthe warranty is invoked, the Company may be required to correct errors in itssoftware rather than refund any fees under the arrangement. As of September 30,2005, this warranty has not been invoked by any of the Company’s customers.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

Except for the historicalinformation contained herein, the matters discussed in this Report on Form 10-Qare forward-looking statements involving risks and uncertainties that couldcause actual results to differ materially from those in such forward-lookingstatements. Numerous factors, risks and uncertainties affect the Company’soperating results and could cause the Company’s actual results to differ materiallyfrom forecasts and estimates or from any other forward-looking statements madeby, or on behalf of, the Company, and there can be no assurance that futureresults will meet expectations, estimates or projections. Further informationregarding these and other risks is included in this Form 10-Q and in ourother filings with the SEC.

 

**Overview**

 

@Road is a leading globalprovider of solutions designed to automate the management of mobile resourcesand to optimize the service delivery process for our customers. By providingMobile Resource Management (“MRM”) infrastructure integrating wirelesscommunications, location-based technologies, software applications, transactionprocessing and the Internet, @Road solutions provide a secure, scalable,upgradeable, enterprise-class platform, offered in hosted, on-premise or hybridenvironments that connect mobile workers in the field to corporate dataon-demand.

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@Road combines threeelements of MRM—Field Force Management, Field Service Management and FieldAsset Management—to create solutions for a variety of industries, includingtransportation, telecommunications, facilities, utilities, construction andfield services. Our solutions can be summarized as follows:

 

•      **Field Force Management:**Through the integration of wireless,Global Positioning System (GPS), satellite and Internet technologies, @RoadField Force Management solutions are designed to connect mobile workers in thefield to corporate data on demand. @Road software products are designed to helpcustomers measure overall mobile workforce performance and are designed to helpreduce costs and maximize return on investment.

•      **Field Service Management:** The @Road *taskforce*SM software is designed to helpservice providers deliver high quality service to their customers. @Road FieldService Management solutions provide companies with a current view across theirfield service resource network so they can offer improved scheduling, routingand customer service.

•      **Field Asset Management:** @Road solutions such as vehicle diagnostics and vehicle sensorsare designed to help customers manage their mobile assets. Whether a companywants to determine when vehicles are due for service, track inventory in remotevehicles, or receive alerts when a mobile worker is having engine trouble,@Road solutions help to minimize costs, maximize warranties, and manage themobile worker’s assets.

 

Our MRM solutions aredesigned to be easy to implement and use, and to provide a secure, scalable andupgradeable platform. Our customers can manage their mobile workers in severalways, including by logging onto our web site, receiving data directly intotheir existing software applications, accessing our speech-to-text voice portalby telephone, or requesting information from our data centers using applicationprogramming interfaces.

 

From July 1996through June 1998, our operations consisted primarily of various start-upactivities relating to our MRM solutions, including development of GPStechnologies, recruiting personnel and raising capital. We did not recognizeany revenue prior to June 1998, and our expenses consisted of research anddevelopment, sales and marketing, and general and administrative expenses. In1998, we expanded our strategy and redirected our focus to providelocation-relevant and time-sensitive information solutions to companiesmanaging mobile resources. In the second half of 1998, we introduced the firstversion of a MRM solution that is now called @Road GeoManagerSM*i*LM®,which provides location, reporting, dispatch, messaging, and other managementservices to help companies efficiently manage their mobile resources.Subsequent to the introduction of @Road GeoManager *i*LM,we have introduced a number of new MRM solutions, such as:

 

•      **@Road GeoManager PE**SM**:** a hand-heldMRM solution that uses a location-enabled mobile telephone to provide the @RoadGeoManager service.

•      **@Road Pathway**SM***i*LM:** a mid-levelin-vehicle MRM solution that delivers metrics to measure mobile workforceperformance and manage compliance with business rules.

•      **@Road Pathway PE**SM**:** a hand-held MRM solution that uses a location-enabledmobile telephone to provide the @Road Pathway*i*LM service.

•      **@Road Portico**SM***i*LM:** anentry-level in-vehicle offering providing a cost-effective MRM solution.

 

In addition, we havedeveloped and packaged a specified set of MRM solutions for three of our targetvertical markets. These application suites are designed to provideindustry-appropriate solutions. We currently offer the following solutionsuites:

 

•      The @RoadTelco, Cable and Utilities Suite

•      The@Road Transportation and Distribution Suite

•      The@Road Facilities Management Suite

 

Our MRM solutions providecurrent and historical data relating to a customer’s mobile resources in avariety of formats, including activity reports, maps and completed businessforms. We provide these formats in a standard configuration, and customers canconfigure certain elements and views themselves to help achieve compliance withtheir internal business rules. Customers can choose to submit queries throughour applications to create reports and views on demand, or they can havereports delivered on a pre-scheduled basis. Customers can also download reportsto manipulate and store data as desired. Mobile resource data is typicallystored by us for 30 to 45 days, but is stored for longer periods for customersthat purchase our extended data storage service.

 

We commenceimplementation of our MRM solutions with the deployment of a hardware device toeach of the customer’s mobile resources. We call each mobile resource with sucha hardware device a ‘‘subscriber.’’ Our services operate with three hardwaredevice types:

 

•      **In-Vehicle:** Our proprietary Internet Location Manager (“*i*LM”) hardware device integrates a GPS receiver and awireless modem with embedded operating and diagnostic software. We offerseveral models of*i*LM devices. An*i*LM is installed in a mobile worker’svehicle. Installation is typically completed in less than one hour and is performedby our subcontracted installation agents.

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•      **In-Vehicle—Wi-Fi:** Our proprietary Internet LocationManager—Wi-Fi (“*i*LM-W”) hardwaredevice integrates a GPS receiver, a wireless modem and a Wi-Fi transmitter withembedded operating and diagnostic software. We currently offer one *i*LM-W device model, but plan to offerdifferent models in the future. An *i*LM-Wis installed in a mobile worker’s vehicle. Installation is typically completedin less than one hour and is performed by our subcontracted installationagents.

 

•      **Hand-held:**@Road works with several wireless carriers tooffer our solutions on location-enabled or wireless applicationprotocol-enabled mobile telephones. Customers download our software into thesemobile telephones as part of implementing our solutions.

 

These hardware devicessend and receive a variety of information from time to time and on demand. Suchdata includes location, velocity, time, operational diagnostics and businessinformation. These data are transmitted to our data centers using wirelessnetworks and the Internet. If a wireless connection to a hardware device is notavailable, then the hardware device will typically store up to five days ofcaptured data and seek to transmit the data when a wireless connection isavailable.

 

In February 2005, wecompleted the acquisition of Vidus (“Vidus”). Vidus' Field Service Managementsoftware solution, *taskforce,* isdesigned to help service providers deliver high quality service to theircustomers. This solution provides companies with a current view across thefield service resource network so they can offer improved scheduling, routingand customer service.

 

We offer *taskforce* as a licensed software solution,but expect to offer it on a managed services basis and hosted basis in thefuture. Customer arrangements for the customizable *taskforce*solution typically include a licensing fee,installation, training and post-contract customer support services to endusers.

 

Since 1998, we havederived substantially all of our revenues from the sale of our MRM solutions.Our customers generally contract to receive our MRM solutions for terms of oneto five years, and are provided the option to purchase enhanced servicefeatures for additional fees. Upon the completion of the initial term of acustomer’s contract, the customer’s service continues on a month-to-monthbasis. Our hosted revenue is comprised of monthly fees for our MRM solution,and upfront or monthly fees for the in-vehicle hardware device enabling themobile resource to utilize our MRM solution. As more customers use our MRMsolutions, the impact on our hosted revenue is compounded. Our licensed revenueis comprised of license, installation and related post-contract customer supportfees for our*taskforce* softwaresolution.

 

To date, we have not soldour MRM solutions outside the United States and Canada; however, we intend toexpand our MRM solutions to additional countries in the future. We have soldand currently sell our *taskforce*solution in the United States and Europe. Verizon Communications represented12% and 14% and British Telecommunications plc (BT) represented 18% and 7% ofour total revenues for the three and nine months ended September 30, 2005,respectively. Verizon Communications represented 18% of our total revenues forthe three and nine months ended September 30, 2004.

 

Since our inception, wehave invested substantially in research and development, marketing, thebuilding of our sales channels and our overall infrastructure. We anticipatethat such investments may increase in the future. We incurred a loss before taxin the quarter ending September 30, 2005 and incurred losses in eachquarter from inception through the quarter ending September 30, 2003. Wemay incur net losses in the future. At September 30, 2005, we had anaccumulated deficit of $81.8 million. We may not sustain profitability ona quarterly or annual basis.

 

Verizon Wireless is expectedto cease operating its CDPD network on December 31, 2005. We are indiscussions with Verizon Wireless to minimize any disruption to the delivery ofour services to our customers. We have notified customers comprisingsubstantially all of the subscribers whose services would be affected by theproposed termination of this CDPD network. At September 30, 2005,approximately 3,500 of our core subscribers have yet to complete negotiationswith us for their migration plans from this CDPD network. Additionally, at September 30,2005, Verizon Communications, which represents approximately 16,000 additionalsubscribers, has yet to determine its migration plans from the CDPD network.

 

To use an alternatenetwork, existing hardware devices would have to be replaced for subscriberscurrently using a CDPD network. While we do not anticipate losses on the saleof these replacement hardware devices, if we are unable to migrate thesecustomers in a timely fashion, we may offer price concessions. If we were tooffer such concessions, they could have a material adverse impact on our financialresults.

 

**Criticalaccounting policies**

 

Financial ReportingRelease No. 60, which was released by the SEC in January 2002,requires all companies to include a discussion of critical accounting policiesor methods used in the preparation of financial statements. Included in Note 1of the Notes to the Consolidated Financial Statements for the year ended December 31,2004 filed on Form 10-K is a summary of the significant accountingpolicies and methods that we use. The following is a discussion of the moresignificant of these policies and methods.

 

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***Revenue recognition***

 

We follow specific anddetailed guidelines in recognizing revenue in accordance with the provisions ofAICPA Statement of Position 97-2,*SoftwareRevenue Recognition*, as amended by Statement of Position 98-4 andStatement of Position 98-9, as well as Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts* andStatement of Position 81-1*, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.*We recognize revenue when the price is fixed and determinable, upon persuasiveevidence of an agreement, when we have fulfilled our obligations under any suchagreement and upon a determination that collectibility is probable.

 

Our revenues are derivedfrom two sources, hosted revenues and licensed revenues. Hosted revenues arederived from monthly fees for our MRM solutions and upfront or monthly fees forthe hardware device enabling the mobile resource to utilize our MRM solution.Licensed revenues are derived from license fees, installation fees and trainingand post contract customer support services to end users.

 

Monthly fees for our MRMhosted solutions are recognized ratably over the minimum contract period, whichcommences (a) upon installation where customers have installed ourproprietary hardware devices in mobile worker vehicles or (b) upon thecreation of subscription licenses and a customer account on our website wherecustomers have elected to use our MRM solution with a location- or wirelessapplication protocol- enabled mobile telephone. Upfront fees for our MRM hostedsolution primarily consist of amounts for the Internet Location Manager,Internet Data Terminal, Internet Location Manager - WiFi or a ruggedizedpersonal digital assistant. We defer upfront fees at installation and recognizethem ratably over the minimum contract period, generally one to five years.Renewal rates for our MRM solution are not considered priced at a bargain in comparisonto the upfront fees (as described in Staff Accounting Bulletin No. 104,*Revenue Recognition*). Changes to thepricing of the upfront and monthly fees for our MRM solutions in the futurecould result in the recognition of upfront fees over periods that extend beyondthe minimum contract period.

If we cannot objectivelydetermine the fair value of any undelivered element included in hostedarrangements, we defer revenue until all elements are delivered, all serviceshave been performed or fair value can objectively be determined.

 

Historically, the feesfor our proprietary hardware devices have often been at or below our costs. Ifthe fees for the hardware devices are above our costs, such excess is amortizedratably over the minimum contract period. If the fees for the hardware devicesare below our costs, such amount is expensed to cost of hosted revenue at thetime of shipment.

 

For arrangements withmultiple elements, such as licenses, customization services and post-contractcustomer support services, we allocate revenue to each element of a transactionbased upon its fair value as determined in reliance on vendor specificobjective evidence. Vendor specific objective evidence of fair value for allelements of an arrangement is based upon the normal pricing and discountingpractices when sold separately, and post-contract customer support services isadditionally measured by the renewal rate. If we cannot objectively determinethe fair value of any undelivered element included in license arrangements, wedefer revenue until  the earliest tooccur of: 1) all elements are delivered, 2) all services have been performed orwhen only post-contract customer support services remain to be delivered, or 3)fair value can objectively be determined. When the fair value of a deliveredelement has not been established, we use the residual method to record licenserevenue if the fair value of all undelivered elements is determinable. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the fee is allocated to the delivered elements and isrecognized as revenue.

 

Licensed revenuesassociated with the fees for the license of our*taskforce* product and related customization and installation aregenerally recognized using the percentage-of-completion method of accountingover the period that services are performed. For agreements accounted for underthe percentage-of-completion method, we determine progress to completion basedon actual direct labor hours incurred to date as a percentage of the estimatedtotal direct labor hours required to complete the project. We periodicallyevaluate the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, we have not incurred any such losses. Costsincurred in advance of billings are recorded as costs in excess of relatedbillings on uncompleted contracts. If the amount of revenue recognized exceedsthe amounts billed to customers, the excess amount is recorded as unbilledaccounts receivable. If the amount billed exceeds the amount of revenuerecognized, the excess amount is recorded as customer deposits. Revenuerecognized in any period is dependent on our progress toward completion ofprojects in progress. Significant management judgment and discretion are usedto estimate total direct labor hours. Any changes in or deviations from these estimatescould have a material effect on the amount of revenue we recognize in anyperiod.

 

We derive post-contractcustomer support fees from post-contract customer support contracts, which aregenerally purchased at the same time as a license for our*taskforce* product. Post-contract customersupport can include telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. Post-contract customersupport may generally be renewed on an annual basis. We recognize revenue forpost-contract customer support, based on vendor specific objective evidence offair value, ratably over the term of the post-contract customer support period.We generally determine vendor specific objective evidence of post-contractcustomer support based on the stated fees for post-contract customer supportrenewal set forth in the original license agreement. If we are unable toestablish vendor specific objective evidence of fair value, we recognize allfees ratably over the term of the post-contract customer support, when the onlyundelivered element is post-contract customer support.

 

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***Business combinations***

 

In accordance with theprovisions of SFAS 141, the purchase price of an acquired company is allocatedbetween intangible assets and the net tangible assets of the acquired businesswith the residual of the purchase price recorded as goodwill. The determinationof the value of the intangible assets acquired involves certain judgments and estimates.These judgments can include, but are not limited to, the cash flows that anasset is expected to generate in the future and the appropriate weightedaverage cost of capital.

 

At September 30,2005 our goodwill totaled $21.1 million and our identifiable intangibleassets totaled $30.6 million. In accordance with the provisions of SFAS 142,we assess the impairment of goodwill and indefinite lived identifiableintangible assets of our reportable units annually, or more often if events orchanges in circumstances indicate that the carrying value may not berecoverable. This assessment is based upon a discounted cash flow analysis andanalysis of our market capitalization. The estimate of cash flow is based upon,among other things, certain assumptions about expected future operatingperformance and an appropriate discount rate determined by our management. Ourestimates of discounted cash flows may differ from actual cash flows due to,among other things, economic conditions, changes to the business model orchanges in operating performance. Significant differences between theseestimates and actual cash flows could materially affect our future financialresults. We conducted our initial annual impairment test as of August 31,2005 and determined there was no impairment. There were no events orcircumstances from that date through September 30, 2005 indicating that afurther assessment was necessary.

 

***Allowances for doubtful accounts***

 

Historically, we have hada significant number of small- to medium-sized companies utilizing oursolutions. These customers are involved in diverse businesses. Our paymentarrangements with customers generally provide 30 to 45 day payment terms. Whencustomers contract with us, we assess their creditworthiness.

 

The nature of ourrelationship with customers is inherently long-term and we have extended andmay extend payment terms on an exception basis. We regularly review ourcustomers’ ability to satisfy their payment obligations and provide anallowance for doubtful accounts for all specific receivables that we believeare not collectible. When these conditions arise, we suspend recognition ofrevenue until collection becomes probable or cash is collected. Beyond thesespecific customer accounts, we record an allowance based on the size and age ofall receivable balances against which we have not established a specificallowance. These allowances are based on our experience in collecting suchaccounts.

 

Although we believe thatwe can make reliable estimates for doubtful accounts, the size and diversity ofour customer base, as well as overall economic conditions, may affect ourability to accurately estimate revenue and bad debt expense. Actual results maydiffer from those estimates.

 

***Income taxes***

 

We have substantialdeferred tax assets that relate to prior periods losses, primarily in theUnited States and the United Kingdom.  Weevaluate these deferred tax assets in each tax jurisdiction by estimating thelikelihood of generating future profits to realize these assets.  In both jurisdictions, we have concluded thatit is more likely than not that we will generate sufficient future taxableincome to realize these assets.  Withrespect to approximately $41.3 million of our deferred tax assets, we madethis determination in the three months ended September 30, 2005 resultingin the reversal of the valuation allowance.

 

This evaluation ofwhether it is more likely than not that such deferred tax assets will berealized must be continuously evaluated. Accordingly the occurrence of negativeevidence regarding our deferred tax assets could result in a future need for a valuationallowance, which could have a material effect on our results of operations.

 

 

 

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**RESULTSOF OPERATIONS**

 

**The threeand nine months ended September 30, 2005 and 2004.**

 
| ** **                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Hosted  revenues                                                            |       | $                                          | 18,965     |                                      | $          | 19,102 |   | $ | 58,140 |   | $ | 55,325 |   |
|                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Cost  of hosted revenue (excluding intangibles amortization included below) |       | 10,238                                     |       | 8,582                                     |       | 28,989 |   | 25,619 |   |
| Intangibles  amortization                                                   |       | —                                     |       | 7                                         |       | — |   | 28 |   |
|                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Total  cost of hosted revenue                                               |       | 10,238                                     |       | 8,589                                     |       | 28,989 |   | 25,647 |   |
|                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Hosted  gross profit                                                        |       | $                                          | 8,727      |                                      | $          | 10,513 |   | $ | 29,151 |   | $ | 29,678 |   |
|                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Hosted  gross margin percentage                                             |       | 46                                         | %          | 55                                        | %          | 50 | % | 54 | % |

 

***Hosted revenues***

 

Hosted revenues decreased 1% for the three months ended September 30,2005 from the same period in 2004 as a result of decreased revenue persubscriber. Hosted revenues increased 5% for the nine months ended September 30,2005 from the same period in 2004, primarily the result of an 8% growth incustomers using our services, partially offset by the decreased revenue persubscriber. In addition to customer growth, our hosted revenues are affected bya number of factors, including the rate at which service features or add-onsare adopted, the pricing associated with the size and term of customercontracts, and purchases of our hardware devices. Given the fixed nature of ourarrangements with our customers and ratable revenue recognition, the impact onrevenues of changes in current prices for hosted solutions is tempered. This isbecause revenues from new pricing are layered on top of revenues from existingcustomers.

 

As new customers purchaseour hardware devices or as existing customers choose to purchase new hardwaredevices, the amount of deferred revenue recognized ratably over the minimumcontract period increases. This effect is tempered by customers purchasingsolutions that are deployed through the use of a location- or wirelessapplication protocol-enabled mobile telephone installed with our softwareapplication because we do not sell those devices and, therefore, do notrecognize any revenues for such device sales. A similar tempering effect mayoccur upon completion of the initial term of a customer’s contract becauserecognition of deferred revenue is complete and those customers may then renewtheir agreements for future services without the purchase of new hardwaredevices.

 

Average monthly hostedrevenue per subscription was approximately $43.29 for the three months ended September 30,2005, down from $49.30 for the same period in 2004. Average monthly hostedrevenue per subscription was approximately $46.52 for the nine months ended September 30,2005, down from $47.88 for the same period in 2004. The decreases of $6.01 and$1.36 primarily resulted from the price changes associated with the types ofservices and size and term of contracts for new customers as those revenueswere layered on top of the revenues from existing customers.

 

Underlying price changesis a trend related to the variety of wireless protocols we now offer customers,including General Packet Radio Services, Code Division Multiple Access 1xRTT,the Integrated Digital Enhanced Network and Enhanced Data forGlobal Evolution. We describe those arrangements in whichcustomers contract directly with wireless carriers for the wireless airtimecomponent of our solutions as “unbundled”. Conversely, we describe arrangementsin which we contract directly with customers for the wireless airtime portionas “bundled”. The nature of our relationship with the wireless carriersdictates whether we will be entering into a bundled or unbundled arrangementwith the customer. Selection of the appropriate protocol is related primarilyto optimal wireless coverage for a specific customer area of operation.Additionally, we are generally indifferent as to whether a bundled or unbundledarrangement results with a new customer because we have priced our solutionssuch that a similar contribution to gross profits results from eitherarrangement. We have observed an increase in the proportion of new subscribersbeing added on an unbundled basis, resulting in decreased revenue from suchcustomers. We expect that this trend will continue through the next 12 to18 months.

 

 

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***Cost of hosted revenue (excluding intangibles amortization)***

 

Cost of hosted revenueconsists of the amortization of the deferred cost of the*i*LM, *i*LM-W,and related parts or peripheral devices to the *i*LMor *i*LM-W; costs associated withthe final assembly, testing, provisioning, delivery and installation ofhardware, and other costs such as provisions for inventory and repair costs;and expenses related to the delivery and support of our MRM solutions. Cost ofhosted revenue increased to $10.2 million from $8.6 million for the threemonths ended September 30, 2005 and 2004, respectively. The increase wasprimarily the result of increases in employee-related expenses of $679,000,amortization of deferred product costs of $426,000, facilities andcommunication expenses of $291,000, product repair and refurbishment costs of$220,000 and provision for inventory valuation of $180,000, partially offset bya decrease in direct service delivery expenses of $575,000. Cost of hostedrevenue headcount increased to 202 at September 30, 2005 from 141 at September 30,2004, respectively. We expect cost of hosted revenue to increase during thenext 12 months, primarily resulting from headcount increases.

 

Cost of hosted revenueincreased to $29.0 million from $25.6 million for the nine months ended September 30,2005 and 2004, respectively. The increase was primarily the result of increasesin employee-related expenses of $1.6 million, amortization of deferred productcosts of $1.1 million, facilities and communication expenses of $710,000,product repair and refurbishment costs of $565,000, provision of inventoryvaluation of $364,000 and equipment and depreciation expenses of $291,000,partially offset by a decrease in direct service delivery expenses of $1.9million.

 

***Intangibles amortization***

 

Intangibles amortizationrelates to the intangible assets purchased from Differential Corrections, Inc.in April 2000 and ConnectBusiness.com, Inc. in September 2002.The costs were amortized over their estimated useful lives of three and twoyears, respectively. As of September 30, 2005, these intangibles werefully amortized.

 

***Hosted gross margin***

 

Hosted gross marginsdecreased to 46% from 55% during the three months ended September 30, 2005from the same period in 2004 and decreased to 50% from 54% during the ninemonths ended September 30, 2005 from the same period in 2004, as a resultof higher employee-related expenses.

 
| ** **                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Licensed  revenues                                                            |       | $                                          | 6,004      |                                      | $          | — |   | $ | 7,447 |   | $ | — |   |
|                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Cost  of licensed revenue (excluding intangibles amortization included below) |       | 1,481                                      |       | —                                    |       | 3,654 |   | — |   |
| Intangibles  amortization                                                     |       | 1,010                                      |       | —                                    |       | 2,477 |   | — |   |
|                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Total  cost of licensed revenue                                               |       | 2,491                                      |       | —                                    |       | 6,131 |   | — |   |
|                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Licensed  gross profit                                                        |       | $                                          | 3,513      |                                      | $          | — |   | $ | 1,316 |   | $ | — |   |
|                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Licensed  gross margin percentage                                             |       | 59%                                        |       | —                                    | %          | 18% |   | — | % |

 

***Licensed revenues***

 

For the three and ninemonths ended September 30, 2005, licensed revenues were primarilyattributable to post-contract customer support arrangements related to existingcontracts acquired in the acquisition of Vidus. Included in licensed revenuesfor the three and nine months ended September 30, 2005 is$2.2 million relating to the successful resolution of certain contractcommitments.

 

***Cost of licensed revenue (excluding intangiblesamortization)***

 

For the three and ninemonths ended September 30, 2005, cost of licensed revenue primarilyconsisted of employee related expenses in support of our ongoing post-contractcustomer support commitments.

 

 

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***Intangibles amortization***

 

Intangibles amortizationof approximately $1.0 million and $2.5 million during the three and nine monthsended September 30, 2005 relates to the Vidus acquisition. The costs arebeing amortized over their estimated useful lives of three to ten years.

*** ***

***Sales and marketing expenses***

 

Sales and marketingexpenses consist of employee salaries, sales commissions and marketing andpromotional expenses. Sales and marketing expenses increased to $5.5 millionfrom $2.9 million for the three months ended September 30, 2005 and 2004,respectively. The increase was primarily attributable to increases inemployee-related expenses of $1.6 million, travel expenses of $257,000,promotional expenses of $244,000, facilities and communication expenses of$196,000 and consultant expenses of $151,000. The increase in employeecompensation expense was associated with an increase in the average headcount.Sales and marketing headcount increased to 132 at September 30, 2005 from99 at September 30, 2004.

 

Sales and marketingexpenses increased to $16.0 million from $9.1 million for the nine months endedSeptember 30, 2005 and 2004, respectively. The increase was primarilyattributable to increases in employee-related expenses of $4.2 million,promotional expenses of $794,000, consultant expenses of $586,000, facilitiesand communication expenses of $510,000 and travel expenses of $448,000. Weexpect that sales and marketing expenses will increase as we expand our salesand marketing efforts, including, but not limited to, modest headcount growthand promotional expenses related to new product and service offerings.

 

***Research and development expenses***

 

Research and developmentexpenses consist of employee salaries and expenses related to developmentpersonnel and consultants, as well as expenses associated with software andhardware development. Research and development expenses increased to$3.5 million from $1.7 million for the three months ended September 30,2005 and 2004, respectively. The increase was primarily the result of increasesin employee-related expenses of $1.4 million, consultant expenses of $389,000and equipment and depreciation expenses of $114,000, partially offset by adecrease in external product development expenses of $268,000. Research anddevelopment headcount increased to 136 at September 30, 2005 from 67 at September 30,2004.

 

Research and developmentexpenses increased to $9.9 million from $4.5 million for the ninemonths ended September 30, 2005 and 2004, respectively. The increase wasprimarily the result of increases in employee-related expenses of $3.8 million,consultant expenses of $1.1 million, equipment and depreciation expenses of$286,000, travel expenses of $198,000 and facilities and communication expensesof $156,000, partially offset by a decrease in external product developmentexpenses of $249,000. We expect that research and development expenses willincrease in future periods as we continue to develop and introduce new productsand services.

 

***General and administrative expenses***

 

General andadministrative expenses consist of employee salaries and related expenses forexecutive and administrative costs, accounting and professional fees,recruiting costs and provisions for doubtful accounts. General andadministrative expenses increased to $4.7 million from $3.2 millionfor the three months ended September 30, 2005 and 2004, respectively. Theincrease was primarily the result of increases in employee-related expenses of$791,000, a change in the provision for doubtful accounts of $236,000,accounting and audit fees of $191,000, travel expenses of $151,000 and tax andlicense fees of $107,000, partially offset by decreases in consulting fees andtemporary employee-related expenses of $228,000 and recruiting fees of$129,000. Consulting fees and temporary employee-related expenses wereprimarily related to compliance activities in connection with theSarbanes-Oxley Act of 2002. General and administrative headcount increased to101 at September 30, 2005 from 67 at September 30, 2004.

 

General andadministrative expenses increased to $13.1 million from $7.8 millionfor the nine months ended September 30, 2005 and 2004, respectively. Theincrease was primarily the result of increases in employee-related expenses of$2.2 million, accounting and audit fees of $846,000, equipment and depreciationexpenses of $506,000, consulting fees and temporary employee-related expensesof $384,000, a change in the provision for doubtful accounts of $364,000,travel expenses of $277,000 and facilities and communications expenses of$260,000. Consulting fees and temporary employee-related expenses wereprimarily related to compliance activities in connection with theSarbanes-Oxley Act of 2002. We expect that general and administrative expenseswill increase in future periods, including modest increases in employee-relatedexpenses.

 

 

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***In-process research and development***

 

For the nine months endedSeptember 30, 2005, in-process research and development primarilyconsisted of research projects that had not reached technological feasibilityand had no alternative future use at the time of the acquisition of Vidus.

*** ***

***Terminated acquisition costs***

*** ***

On April 12, 2004,we entered into a Combination Agreement with MDSI Mobile Data Solutions, Inc.(“MDSI”) providing for the acquisition of MDSI. On July 27, 2004, theparties mutually agreed to terminate the Combination Agreement. As a result,for the three and nine months ended September 30, 2004, we expensedapproximately $139,000 and $2.2 million of acquisition-related costs,respectively.

 

***Interest income, net***

 

Interest income iscomposed primarily of interest income on cash, cash equivalents and short-terminvestments. Interest income net of interest expense increased to $781,000 from$426,000 in the three months ended September 30, 2005 and 2004,respectively, and increased to $2.1 million from $1.0 million in the ninemonths ended September 30, 2005 and 2004, respectively. The increases wereprimarily the result of larger invested balances and higher rates of returnduring the 2005 periods.

 

***Other income, net***

 

During the three and ninemonth periods ended September 30, 2005 and 2004, other income, netconsisted primarily of net foreign currency translation gains related to oursubsidiaries in India and the United Kingdom.

 

***Benefit from income taxes***

 

The benefit for incometaxes differs from the amount computed by applying the statutory United Statesfederal rate due to the reversal of the valuation allowance in the UnitedStates. During the three months ending September 30, 2005, it was determinedthat a valuation allowance reported against our deferred tax assets was nolonger necessary based on our evaluation of current evidence and its effect onour estimate of future earnings. Accordingly, we reversed our deferred taxvaluation allowance with respect to approximately $41.3 million of our deferredtax assets, of which approximately $35 million was recorded as a benefit in thestatement of operations.

 

***Preferred stock dividends***

 

During the three and ninemonths ended September 30, 2005, we accrued $124,000 and $305,000 fordividends on redeemable preferred stock issued in relation with the acquisitionof Vidus.

 

We believeperiod-to-period comparisons of our operating results are not necessarilymeaningful. You should not rely on them to predict our future performance. Theamount and timing of our operating expenses may fluctuate significantly in thefuture as a result of a variety of factors.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of September 30,2005, we held $42.6 million of cash and cash equivalents and $53.0 millionof short-term investments. Working capital totaled $106.5 million at September 30,2005.

 

Net cash (used in)provided by operating activities was $(13.5) million and $7.6 millionfor the nine months ended September 30, 2005 and 2004, respectively. Thedecrease was primarily attributable to an increase in assets of $26.0 millionand a non-cash benefit of $43.7 million related to the reversal of a valuationallowance, partially offset by increases in net income of $18.1 million,non-cash charges of $15.2 million and liabilities of $15.2 million.Non-cash charges to earnings include in-process research and developmentexpenses, depreciation and amortization expenses, tax benefits on the exerciseof employee stock options, provisions for doubtful accounts and sales returnsand provisions for inventory valuation. At September 30, 2005,approximately $865,000 of our gross accounts receivable were over 90 daysold. We believe we have adequately provided allowances as of September 30,2005 for any such amounts that may ultimately become uncollectible.

 

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Net cash provided byinvesting activities during the nine months ended September 30, 2005 was$40.4 million, which was comprised of $125.7 million in proceeds fromsale of short-term investments, partially offset by $75.3 million used topurchase short-term investments, $6.9 million used for the acquisition ofVidus, net of cash acquired, and $3.1 million used to purchase property andequipment.

 

Net cash provided byfinancing activities decreased to $1.2 million from $2.5 million for thenine months ended September 30, 2005 and 2004, respectively, due to adecrease in stock option exercises.

 

We believe that existingcash, cash equivalents and short-term investments, together with any cashgenerated from operations, will be sufficient to fund our operating activities,capital expenditures and other obligations for at least the next twelve months.

 

We have certain fixedcontractual obligations and commitments that include future estimated payments.Changes in our business needs, cancellation provisions, changing interest ratesand other factors may result in actual payments differing from the estimates.We cannot provide certainty regarding the timing and amounts of all payments.We have presented below a summary of the most significant assumptions used inour determination of amounts presented in the tables, in order to assist in thereview of this information within the context of our consolidated financialposition, results of operations and cash flows. The following table represents our significantfixed contractual obligations and commitments as of September 30, 2005 (inthousands):

 
| ** **                      | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** |
|---------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| Operating  lease commitments    |       | $         | 5,856      |                  | $          | 1,431         |       | $             | 2,569      |                   | $          | 1,856 |   | $ | — |   |
| Inventory  purchase commitments |       | 1,091     |       | 1,091                 |       | —        |       | —        |       | —                 |       |
| Other  purchase obligations     |       | 1,987     |       | 1,987                 |       | —        |       | —        |       | —                 |       |
|                            |       |      |       |                  |       |          |       |          |       |                   |       |
|                            |       | $         | 8,934      |                  | $          | 4,509         |       | $             | 2,569      |                   | $          | 1,856 |   | $ | — |   |

 

Other long-termliabilities in our condensed consolidated balance sheet as of September 30,2005 include a deferred rent liability of $442,000. The payments related tothis amount are included in operating lease commitments above.

 

Operating leasecommitments include minimum rental payments under our non-cancelable operatingleases for office facilities, as well as limited office equipment that weutilize under lease arrangements. The amounts presented are consistent withcontractual terms and are not expected to differ significantly unless asubstantial change in our headcount needs requires us to exit an office facilityearly or expand our occupied space.

 

Inventory purchasecommitments include minimum payments under non-cancelable commitments for goodsthat were entered into through our ordinary course of business.

 

Other purchase obligation amounts include minimum purchase commitmentsfor marketing, computer equipment, software applications, engineeringdevelopment services and other goods and services that were entered intothrough our ordinary course of business. These contractual arrangements containsignificant performance requirements. Given the significance of the performancerequirements, actual payments could differ significantly from these estimates.

 

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**RISKFACTORS**

 

In addition to the otherinformation contained in this Report on Form 10-Q, the following factorsshould be carefully considered in evaluating our business and prospects. Therisks and uncertainties described below are intended to be ones that arespecific to us or our industry and that we deem material, but they are not theonly ones that we face.

 

**On February 18,2005, we acquired Vidus Limited (“Vidus”). The combined company may not realizeexpected benefits because of integration and other challenges.**

 

If the combined companyfails to meet the challenges involved in integrating its operations andproducts successfully or otherwise fails to realize any of the anticipatedbenefits of the acquisition, then the results of operations of the combinedcompany could be seriously harmed. Realizing the benefits of the acquisition,if any, will depend in part on the successful integration of technology,operations and personnel. The integration of the companies is a complex,time-consuming and expensive process that could significantly disrupt thebusiness of the combined company, and planning and predicting future growthrates, if any, and operating results will be more difficult for the combinedcompany.

 

The combined company maynot successfully integrate the operations of @Road and Vidus in a timelymanner, or at all, and the combined company may not realize the anticipatedbenefits of the acquisition to the extent, or in the timeframe, anticipated.The anticipated benefits of the acquisition are based on projections andassumptions, including successful integration, not actual experience. Inaddition to the integration risks discussed above, the combined company’sability to realize those benefits could be adversely affected by practical,legal or accounting constraints.

 

**We haveincurred or expect to incur significant costs associated with the acquisitionof Vidus.**

 

In connection with theacquisition of Vidus, we have incurred estimated acquisition related costs of$2.6 million. There can be no assurance that the combined company will notincur additional material charges in subsequent quarters to reflect additionalcosts associated with the acquisition and the integration of the two companies.

 

Under the purchase methodof accounting, we allocated the total estimated purchase price of$54.6 million to Vidus’ tangible assets, purchased technology and otherintangible assets and liabilities assumed of Vidus based on their fair valuesas of the date of completion of the acquisition, and recorded the excess of thepurchase price over those fair values as goodwill. We will incur amortizationexpense over the useful lives of amortizable intangible assets acquired inconnection with the acquisition. In addition, to the extent the value ofgoodwill becomes impaired; we may be required to incur material charges relatingto the impairment of that asset. Any potential impairment charge could have amaterial impact on our results of operations and could have a material adverseeffect on the market value of our common stock.

 

**We havea history of losses, were recently profitable and may not sustain profitabilityin the future.**

 

We incurred a loss beforetax for the three and nine months ended September 30, 2005. Although wewere profitable for each of the three month periods ending September 30,2003 through December 31, 2004, we have a history of losses sinceinception through the three month period ending September 30, 2003 and forthe three month periods ending March 31, 2005 and June 30, 2005. Asof September 30, 2005, we had an accumulated deficit of approximately$81.8 million. To sustain profitability we will need to generatesignificant revenues to offset our cost of revenues and our sales andmarketing, research and development and general and administrative expenses. Wemay not achieve or sustain our revenue or profit goals and may incur losses inthe future.

 

**We facecompetition from internal development teams of potential customers and fromexisting and potential competitors, and if we fail to compete effectively, ourability to acquire new customers could decrease, our revenues would decline andour business would suffer.**

 

The markets for mobileresource management solutions and field service automation software arecompetitive and are expected to become even more competitive in the future. Ifwe do not compete effectively, competition could harm our business and limitour ability to acquire new customers and grow revenues, which in turn couldresult in a loss of our market share and decline in revenues. We believe thatour solutions face competition from a number of business productivitysolutions, including:

 

•solutions developed internally by information technology staff, particularly bylarge customers or prospects;

•discrete means of communication with mobile workers, such as pagers, two-wayradios, handheld devices and cellular telephones;

• solutions targeted at specificvertical markets, such as a service offered by Qualcomm that monitors assets inthe long-haul transportation sector;

 

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• solutions offered by other softwarecompanies, who have developed their own scheduling, routing or customer servicesolutions; and

•solutions offered by other market entrants, many of whom are privately held oroperate on a regional basis.

 

In addition, we believethat our solutions face competition from manufacturing companies that seek toenter the mobile resource management market, such as Trimble Navigation.

 

We also face competitionfrom current and potential third parties with which we have alliances, such aswireless carriers, that have developed or may develop their own solutions orsolutions with captive and other suppliers or that support the marketing ofsolutions of other competitors.

 

We also face numerouschallenges associated with overcoming the following competitive factors:

 

*• Size andresources.*    Many of our current and potentialcompetitors have access to substantially greater financial, marketing,distribution, engineering and manufacturing resources than we do, which mayenable them to react more effectively to new market opportunities and customerrequirements. Furthermore, these competitors may be able to adopt moreaggressive pricing policies and offer more attractive terms than we can.

*• Name recognition.*    Manyof our current and potential competitors have greater name recognition andmarket presence than we do, which may allow them to more effectively market andsell solutions to our current and potential customers.

*• Limits of productand service offerings.*    Although we offer a broadrange of mobile resource management solutions, a customer prospect may requirefunctionality that we do not offer, which may enable current and potentialcompetitors to exploit the areas in which we do not develop solutions.

*• Customerrelationships.*    Many of our current and potentialcompetitors have pre-existing relationships with our large customer prospects,which may allow them to more effectively market and sell competitive mobileresource management solutions.

 

**If,pursuant to its announcement, Verizon Wireless ceases to operate its CellularDigital Packet Data network by the end of 2005 and we are unable to migrate ouraffected customers to an alternate wireless network, our financial resultscould be adversely affected.**

 

Verizon Wireless hasindicated that it will cease to operate its CDPD network on December 31,2005. As of September 30, 2005,approximately 3,500 of our core subscribers have yet to complete negotiationswith us for their migration plans from the Verizon Wireless CDPD network. Additionally, at September 30, 2005,Verizon Communications had approximately 16,000 subscribers to our servicesthat were using the Verizon Wireless CDPD network (collectively with the 3,500core subscribers, the “Verizon Subscribers”). At September 30, 2005,Verizon Communications had yet to determine its migration plans from the CDPDnetwork. We are working with the Verizon Subscribers to migrate them toan alternate wireless protocol. If the Verizon Wireless CDPD network isterminated, the Verizon Subscribers who have not switched to an alternatewireless protocol would have to use another CDPD network, if available, or, ifno other CDPD network is available, the Verizon Subscribers would be unable toutilize our services. If all of the Verizon Subscribers choose to transition toanother protocol, there can be no assurance that we will be able to migrate allsuch subscribers timely or by December 31, 2005. Any resulting decrease inthe total number of subscribers of our services, even if for only a briefperiod, could have a material adverse effect on our financial results.

 

**Anymaterial weakness identified in our internal control over financial reportingor disclosure control and procedures could have an adverse effect on ourbusiness.**

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that companies evaluate and report on theirinternal control over financial reporting and disclosure control andprocedures. In addition, our independent registered public accounting firm mustreport on management’s evaluation as well as evaluate our internal controlstructure and procedures. Other than those disclosed in Part I, Item 4herein, there can be no assurance that there may not be additional materialweaknesses that we would be required to report in the future. In addition, weexpect any required remediation, if applicable, to increase our accounting,legal and other costs, and may divert management resources from other businessobjectives and concerns.

 

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**Ourstock price is volatile, which may cause you to lose money and could lead tocostly litigation against us that could divert our resources.**

 

From time to time, stockmarkets experience dramatic price and volume fluctuations, particularly forshares of technology companies. These fluctuations can be unrelated to theoperating performance of these companies. Broad market fluctuations may reducethe market price of our common stock and cause you to lose some or all of yourinvestment. These fluctuations may be exaggerated if the trading volume of ourcommon stock is low. In addition, due to the technology-intensive nature andgrowth rate of our business and the mobile resource management market, themarket price of our common stock may rise and fall in response to:

 

•quarterly variations in operating results;

•failure to achieve operating results anticipated by securities analysts andinvestors;

•changes in estimates of our financial performance or changes in recommendationsby securities analysts;

•announcements of technological or competitive developments;

•the gain or loss of a significant customer or order;

•disposition of shares of our common stock held by large investors; 

•acquisitions or strategic alliances by us or our competitor; or

•sales or purchases of our common stock by Company insiders or stockholders.

 

When the market price ofa company’s stock drops significantly, stockholders often institute securitiesclass action lawsuits against that company. A lawsuit against us could cause usto incur substantial costs and could divert the time and attention of ourmanagement and other resources from our business.

 

**As weseek to serve larger customers, we face competition from businesses withgreater financial resources, and we may be unable to compete effectively withthese businesses.**

 

The existing market iscompetitive. Competition is particularly vigorous for larger customers, whichis a customer segment we have worked to serve. We expect competition toincrease further as companies develop new products and/or modify their existingproducts to compete directly with ours. In addition, competitors may reduceprices to customers and seek to obtain our customers through cost-cutting andother measures. To the extent these companies compete effectively with us, ourbusiness could be adversely affected by extended sales cycles, fewer sales, andlower prices, revenue and margins.

 

**Thesales cycle for our solutions is long, which may affect our operating results.**

 

Sales of our solutionscan be significant decisions for prospective customers, and the Company devotesconsiderable time and resources to sign such customers. In addition, some of theCompany’s software products often require significant customization for eachcustomer. The Company may not recognize revenue related to such software untilsuch customization is completed and customer acceptance of the software isobtained. As a result, the Company’s operating results on a quarter-to-quarterbasis may fluctuate. Unexpected difficulties in the customization process orthe delay of customer acceptance for a large contract could have a materialadverse effect on the Company’s quarterly financial and operating results.

 

**Vidusrelies on a small number of customers for its revenue.**

 

Vidus, which representsour licensed segment, has only a limited operating history, and historicallyhas been dependent upon a small number of customers for its revenue. If we areunable to develop additional customers or fail to maintain existing customers,our business and operating results will be adversely affected.

 

**Ifwireless communications providers on which we depend for services decide toabandon or do not continue to expand their wireless networks, we may losecustomers and our revenues could decrease.**

 

Currently, our MRMsolutions function on the following networks: General Packet Radio Services (“GPRS”),Code Division Multiple Access 1xRTT (“CDMA 1xRTT”), Integrated Digital EnhancedNetworks (“IDEN”), Cellular Digital Packet Data (“CDPD”) and Enhanced Data ForGlobal Evolution (“EDGE”). These protocols cover only portions of the UnitedStates and Canada. If wireless communications providers abandon theseprotocols, as in the case of CDPD networks, in favor of other types of wirelesstechnology, we may not be able to provide services to our MRM customers. Inaddition, if cellular carriers do not expand their coverage areas, we will beunable to meet the needs of MRM customers who may wish to use our servicesoutside the current cellular coverage area.

 

 

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**Ourquarterly operating results are subject to fluctuations, and our stock pricemay decline if we do not meet the expectations of investors and analysts.**

 

Our quarterly revenuesand operating results are difficult to predict and may fluctuate significantlyfrom quarter to quarter due to a number of factors, many of which are outsideour control. These factors include, but are not limited to:

 

•changes in the market for mobile resource management solutions;

•delays in market acceptance or implementation by customers of our solutions;

•delays in recognition of revenue in relation to a customer;

•delays related to the customization of our solutions for a customer;

•delays of customer acceptance of our solutions;

•changes in length of sales cycles of or demand by our customers for existingand additional solutions;

•changes in the productivity of our distribution channels;

•introduction of new solutions by us or our competitors;

•changes in our pricing policies or those of our competitors or suppliers;

•changes in our mix of sources of revenues;

•general economic and political conditions;

•wireless networks, positioning systems and Internet infrastructure owned andcontrolled by others; and

• any need to migrate to new wirelessnetworks, which could cause our solutions to be incompatible with new wirelessnetworks or become out of date.

 

Our expense levels arebased, in part, on our expectation of future revenues. Additionally, asubstantial portion of our expenses is relatively fixed. As a result, anyshortfall in revenues relative to our expectations could cause significantchanges in our operating results from quarter to quarter. We believeperiod-to-period comparisons of our revenue levels and operating results arenot meaningful. You should not rely on our quarterly revenues and operatingresults to predict our future performance. Our operating results have been, andin some future quarter our operating results may be, below the expectations ofpublic market analysts and investors and, as a result, the price of our commonstock may fall.

 

**Oursuccess depends upon our ability to develop new solutions and enhance ourexisting solutions. If we cannot deliver the features and functionality ourcustomers demand, we will be unable to retain or attract new customers.**

 

If we are unable todevelop new solutions, are unable to enhance and improve our solutionssuccessfully in a timely manner, or fail to position and/or price our solutionsto meet market demand, we may not attract new customers and existing customersmay not expand their use of our solutions, and our business and operatingresults will be adversely affected. If our enhancements to existing solutionsdo not deliver the functionality that our customer base demands, our customersmay choose not to renew their agreements with us when they reach the end oftheir initial contract periods, and our business and operating results will beadversely affected. If we cannot effectively deploy, maintain and enhance oursolutions, our revenues may decrease, we may not be able to recover our costsand our competitive position may be harmed.

 

**Wedepend on a limited number of third parties to manufacture and supply certaincomponents of our solutions.**

 

We rely on a limitednumber of sole suppliers for certain components of our solutions. We do nothave long-term agreements with these suppliers. If these parties do not performtheir obligations, or if they cease to supply the components needed for oursolutions, we may be unable to find other suppliers and our business would beseriously harmed. We cannot be sure that alternative sources for thesecomponents will be available when needed, or if available, that thesecomponents will be available on commercially reasonable terms. These solesuppliers are Motorola, which supplies microcontrollers and certain modems usedin our Internet Location Manager, Micronet, which supplies our Internet DataTerminal, and Everex, which supplies our Internet Location Manager - WiFi.

 

 

 

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Although we believe thatwe have sufficient quantities of microcontrollers and Internet Data Terminalsto last the next twelve months, and we believe we have sufficient quantities ofInternet Location Manager - WiFi to meet our current obligations, if ouragreements with these or other suppliers and manufacturers are terminated orexpire, if we are unable to obtain sufficient quantities of these products orcomponents critical for our solutions, if the quality of these products orcomponents is inadequate, or if the terms for supply of these products orcomponents become commercially unreasonable, our search for additional oralternate suppliers and manufacturers could result in significant delays, addedexpense, contract breaches and our inability to maintain or expand our customerbase. Any of these events could require us to take unforeseen actions or devoteadditional resources to provide our products and services and could harm ourability to compete effectively.

 

**Oursuccess depends on our ability to maintain and expand our sales channels.**

 

To increase our market awareness, customer base and revenues, we needto expand our direct and indirect sales operations. There is strong competitionfor qualified sales personnel, and we may not be able to attract or retainsufficient new sales personnel to expand our operations. New sales personnelrequire training and it takes time for them to achieve full productivity, if atall. In addition, we believe that our success is dependent on the expansion ofour indirect distribution channels, including our relationships with wirelesscarriers and independent sales agents. These sales channel alliances requiretraining in selling our solutions and it will take time for 

these alliances toachieve productivity, if at all. We may not be able to establish relationshipswith additional distributors on a timely basis, or at all. Our independentsales agents, many of which are not engaged with us on an exclusive basis, maynot devote adequate resources to promoting and selling our solutions.

 

**Wedepend on recruiting and retaining qualified personnel and our inability to doso may result in a loss in sales, impair our ability to effectively manage ouroperations or impair our ability to develop and support our solutions.**

 

Because of the technicalnature of our solutions and the market in which we compete, our success dependson the continued services of our current executive officers and our ability toattract and retain qualified personnel with expertise in wireless communications,Global Positioning Systems, hosted and licensed software applications,transaction processing and the Internet. Competitors and others have recruitedour employees in the past and may attempt to do so in the future. In addition,new employees generally require substantial training, which requiressignificant resources and management attention. Even if we invest significantresources to recruit, train and retain qualified personnel, there can be noassurances that we will be successful in our efforts.

 

**Adisruption of our services due to accidental or intentional security breachesmay harm our reputation, cause a loss of revenues and increase our expenses.**

 

Unauthorized access,computer viruses and other accidental or intentional actions could disrupt ourinformation systems or communications networks. We expect to incur significantcosts to protect against the threat of security breaches and to alleviateproblems caused by any breaches. Currently, the wireless transmission of ourcustomers’ proprietary information is not protected by encryption technology.If a third party were to misappropriate our customers’ proprietary information,we could be subject to claims, litigation or other potential liabilities thatcould seriously harm our revenues and result in the loss of customers.Additionally, our European operations are subject to statutory EU warrantieswhich would require us to fix any errors; if so invoked, we would incur coststo fix any such errors.

 

**Systemor network failures could reduce our sales, increase costs or result inliability claims.**

 

Any disruption to ourservices, information systems or communications networks or those of thirdparties could result in the inability of our customers to receive our servicesfor an indeterminate period of time. Our operations depend upon our ability tomaintain and protect our computer systems at data centers located in Ashburn,Virginia and Redwood City, California, and our network operations center inFremont, California. The facilities in California are in or near earthquakefault zones. Our services may not function properly if our systems fail, or ifthere is an interruption in the supply of power, or if there is an earthquake,fire, flood or other natural disaster, or an act of war or terrorism. Withineach of our data centers, we have fully redundant systems; however, in theevent of a system or network failure, the process of shifting access tocustomer data from one data center to the other would be performed manually,and could result in a further disruption to our services. Any disruption to ourservices could cause us to lose customers or revenue, or face litigation,customer service or repair work that would involve substantial costs and coulddistract management from operating our business.

 

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**We mayestablish alliances or acquire technologies or companies in the future, whichcould result in the dilution of our stockholders and disruption of ourbusiness, which could reduce our revenues or increase our costs.**

 

We are continuallyevaluating business alliances and external investments in technologies relatedto our business. Acquisitions of companies, divisions of companies, businessesor products and strategic alliances entail numerous risks, any of which couldmaterially harm our business in several ways, including:

 

•diversion of management’s attention from our core business objectives and otherbusiness concerns;

•failure to integrate efficiently businesses or technologies acquired in the futurewith our pre-existing business or technologies;

•potential loss of key employees from either our pre-existing business or theacquired business;

•dilution of our existing stockholders as a result of issuing equity securities;and

•assumption of liabilities of the acquired company.

 

Some or all of theseproblems may result from current or future alliances, acquisitions orinvestments. Furthermore, we may not realize any value from these alliances,acquisitions or investments.

 

**Oursuccess and ability to compete depends upon our ability to secure and protectpatents, trademarks and other proprietary rights.**

 

Our success depends onour ability to protect our proprietary rights to the technologies used toimplement and operate our services in the United States and in foreigncountries. In the event that a third party breaches the confidentialityprovisions or other obligations in one or more of our agreements ormisappropriates or infringes our intellectual property rights or theintellectual property rights licensed to us by third parties, our businesscould be seriously harmed. To protect our proprietary rights, we rely on acombination of 

trade secrets,confidentiality and other contractual provisions and agreements, and patent,copyright and trademark laws, which afford us only limited protection. Thirdparties may independently discover or invent competing technologies or reverseengineer our trade secrets, software or other technology. Furthermore, laws insome foreign countries may not protect our proprietary rights to the sameextent as the laws of the United States. Therefore, the measures we take toprotect our proprietary rights may not be adequate.

 

**Claimsthat we infringe third-party proprietary rights could result in significantexpenses or restrictions on our ability to provide our solutions.**

 

Third parties may claimthat our current or future solutions infringe their proprietary rights orassert other claims against us. As the number of entrants into our marketincreases, the possibility of an intellectual property or other claim againstus grows. Any intellectual property or other claim, with or without merit,would be time-consuming and expensive to litigate or settle and could divertmanagement attention from focusing on our core business. As a result of such adispute, we may have to pay damages, incur substantial legal fees, developcostly non-infringing technology, if possible, or enter into licenseagreements, which may not be available on terms acceptable to us, if at all.Any of these results would increase our expenses and could decrease thefunctionality of our solutions, which would make our solutions less attractiveto our current or potential customers. We have agreed in some of ouragreements, and may agree in the future, to indemnify other parties for anyexpenses or liabilities resulting from claimed infringements of the proprietaryrights of third parties.

 

**If ourcustomers do not have access to sufficient capacity on reliable wirelessnetworks, we may be unable to deliver our services, our customer satisfactioncould decline and our revenues could decrease.**

 

Our ability to grow andmaintain profitability depends on the ability of wireless carriers to providesufficient network capacity, reliability and security to our MRM customers.Even where wireless carriers provide coverage to entire metropolitan areas,there are occasional lapses in coverage, for example due to tunnels blockingthe transmission of data to and from wireless modems used with our solutions.These effects could make our services less reliable and less useful, andcustomer satisfaction could suffer.

 

 

 

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**Wedepend on Global Positioning System technology owned and controlled by others.If we do not have continued access to GPS technology or satellites, we will beunable to deliver our solutions and revenues will decrease.**

 

Our MRM solutions rely onsignals from Global Positioning System satellites built and maintained by theU.S. Department of Defense. GPS satellites and their ground support systems aresubject to electronic and mechanical failures and sabotage. If one or moresatellites malfunction, there could be a substantial delay before they arerepaired or replaced, if at all, and our products and services may cease tofunction and customer satisfaction would suffer.

 

In addition, the U.S.government could decide not to continue to operate and maintain GPS satellitesover a long period of time or to charge for the use of the Global PositioningSystem. Furthermore, because of ever-increasing commercial applications of theGlobal Positioning System and international political unrest, U.S. governmentagencies may become increasingly involved in the administration or theregulation of the use of GPS signals in the future. If factors such as theforegoing affect the Global Positioning System, for example by affecting theavailability, quality, accuracy or pricing of GPS technology, our business willsuffer.

 

**Defectsor errors in our solutions could result in the cancellation of or delays in theimplementation of our solutions, which would damage our reputation and harm ourfinancial condition.**

 

We must develop our MRMsolutions quickly to keep pace with the rapidly changing MRM market. Solutionsthat address this market are likely to contain undetected errors or defects,especially when first introduced or when new versions are introduced. We may beforced to delay commercial release of new solutions or updated versions ofexisting solutions until such errors or defects are corrected, and in somecases, we may need to implement enhancements to correct errors that were notdetected until after deployment of our solutions. Even after testing andrelease, our solutions may not be free from errors or defects, which could resultin the cancellation or disruption of our services or dissatisfaction ofcustomers. Such customer dissatisfaction would damage our reputation and resultin lost revenues, diverted development resources, and increased service andwarranty costs.

 

**Thereporting of inaccurate location-relevant information could cause the loss ofcustomers and expose us to legal liability.**

 

The accurate reporting oflocation-relevant information is critical to our MRM customers’ businesses. Ifwe fail to accurately report location-relevant information, we could losecustomers, our reputation and ability to attract new customers could be harmed,and we could be exposed to legal liability. We may not have insurance adequateto cover losses we may incur as a result of these inaccuracies.

** **

**Fromtime to time, we are or may be subject to litigation that could result insignificant costs to us.**

 

From time to time, we are or may be subject to litigation in theordinary course of business relating to any number or type of claims, includingclaims for damages related to errors and malfunctions of our products andservices or their deployment. A securities, product liability or other claimcould seriously harm our business because of the costs of defending thelawsuit, diversion of employees’ time and attention, and potential damage toour reputation. Some of our agreements with customers, suppliers and otherthird parties contain provisions designed to limit exposure to potentialclaims. Limitation of liability provisions contained in our agreements may notbe enforceable under the laws of some jurisdictions. As a result, we could berequired to pay substantial amounts of damages in settlement or upon thedetermination of any of these types of claims. Although we carry generalliability and directors and officers insurance, our insurance may not coverpotential claims or may not be adequate to cover all costs incurred in defenseof potential claims or to indemnify us for all liability that may be imposed.

 

**Governmentregulations and standards could subject us to increased regulation, increaseour costs of operations or reduce our opportunities to earn revenue.**

 

In addition toregulations applicable to businesses in general, we may also be subject todirect regulation by United Kingdom, Indian and U.S. governmental agencies,including the Federal Communications Commission, Department of Defense,Department of Commerce or the State Department. These regulations may imposelicensing requirements, privacy safeguards relating to certain subscriber information,or safety standards, for example with respect to human exposure toelectromagnetic radiation and signal leakage. A number of legislative andregulatory proposals under consideration by federal, state, provincial, localand foreign governmental organizations may lead to laws or regulationsconcerning various aspects of the Internet, wireless communications and GPStechnology, including on-line content, user privacy, data protection taxation,access charges and liability for third-party activities. 

 

 

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Additionally, it isuncertain how existing laws governing issues such as taxation on the use ofwireless networks, intellectual property, libel, user privacy and propertyownership will be applied to our solutions. The adoption of new laws or theapplication of existing laws may expose us to significant liabilities andadditional operational requirements, which could decrease the demand for oursolutions and increase our cost of doing business. Wireless communicationsproviders who supply us with airtime are subject to regulation by the FederalCommunications Commission, and regulations that affect them could also increaseour costs or limit the provision of our solutions.

** **

**Fluctuationsin the value of foreign currencies could result in decreased revenues,increased product costs and operating expenses.**

 

We have customers,suppliers and manufacturers that are located outside the United States. Sometransactions relating to supply and development agreements may be conducted incurrencies other than the U.S. dollar, such as the Sterling pound, the Euro andIndian rupee, and fluctuations in the value of foreign currencies relative tothe U.S. dollar could cause us to incur currency exchange costs. In addition,some of our transactions denominated in U.S. dollars may be subject to currencyexchange rate risk. We cannot predict the effect of exchange rate fluctuationson our future operating results. Should there be a sustained increase inaverage exchange rates for the local currencies in these countries, oursuppliers and manufacturers may request a price increase at the end of thecontract period.

 

**Geopolitical,economic and military conditions, including terrorist attacks and other acts ofwar, may materially and adversely affect the markets on which our common stocktrades, the markets in which we operate, our operations and our profitability.**

 

Terrorist attacks andother acts of war, and any response to them, may lead to armed hostilities andsuch developments would likely cause instability in financial markets. Armedhostilities and terrorism may directly impact our facilities, personnel andoperations which are located in the United States, Europe and India, as well asthose of our customers. Furthermore, severe terrorist attacks or acts of warmay result in temporary halts of commercial activity in the affected regions,and may result in reduced demand for our solutions. These developments couldhave a material adverse effect on our business and the trading price of ourcommon stock.

 

**As of September 30,2005, a limited number of stockholders own approximately 40% of our stock andmay act, or prevent certain types of corporate actions, to the detriment ofother stockholders.**

 

Our directors, officersand greater than 5% stockholders own, as of September 30, 2005,approximately 40% of our outstanding common stock. Accordingly, thesestockholders may, if they act together, exercise significant influence over allmatters requiring stockholder approval, including the election of a majority ofthe directors and the determination of significant corporate actions. Thisconcentration could also have the effect of delaying or preventing a change incontrol that could otherwise be beneficial to our stockholders.

** **

**Our certificateof incorporation and bylaws and state law contain provisions that coulddiscourage a takeover.**

 

We have adopted acertificate of incorporation and bylaws, which in addition to state law, maydiscourage, delay or prevent a merger or acquisition that a stockholder mayconsider favorable. These provisions include the following:

 

•establishing a classified board in which only a portion of the total boardmembers will be elected at each annual meeting;

•authorizing the board to issue preferred stock;

•prohibiting cumulative voting in the election of directors;

•limiting the persons who may call special meetings of stockholders;

•prohibiting stockholder action by written consent; and

•establishing advance notice requirements for nominations for election to theboard of directors or for proposing matters that can be acted on bystockholders at stockholder meetings.

 

We have adopted acertificate of incorporation that permits our board to issue shares ofpreferred stock without stockholder approval, which means that our board couldissue shares with special voting rights or other provisions that could deter atakeover. In addition to potentially delaying or preventing an acquisition, theissuance of a substantial number of shares of preferred stock could adverselyaffect the price of our common stock and dilute existing stockholders.

 

 

 

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

**InterestRate Risk**

 

We are exposed to theimpact of interest rate changes and changes in the market values of ourmarketable securities. We have not used derivative financial instruments in ourinvestment portfolio. We invest our excess cash in debt instruments ofhigh-quality corporate issuers and the U.S. government or its agencies. Ourinvestment policy limits the amount of credit exposure to any one issuer andlimits our investments to maturity dates of less than one year. We are averseto principal loss and seek to preserve our invested funds by limiting defaultrisk, market risk and reinvestment risk. We mitigate default risk by investingin high quality credit securities and by positioning our portfolio to respondappropriately to a significant reduction in a credit rating of any investmentissuer or guarantor. The portfolio includes only marketable securities withactive secondary or resale markets to provide portfolio liquidity.

 

Cash, cash equivalentsand marketable securities in both fixed and floating rate interest-earninginstruments carry a degree of interest rate risk. Fixed rate securities mayhave their fair market value adversely impacted due to rising interest rates,while floating rate securities may produce less income than expected ifinterest rates fall. Due in part to these factors, our future interest incomemay fall short of expectations due to changes in interest rates or we maysuffer losses in principal if forced to sell securities that have declined inmarket value due to changes in interest rates.

 

The table below presentsthe carrying value and related weighted average interest rates for our cash,cash equivalents and debt securities. The carrying values approximate fairvalues as of September 30, 2005 and December 31, 2004. As of September 30,2005, debt securities consisted of $42.6 million with original maturity datesof 90 days or less and $53.0 million with original maturity dates ofgreater than 90 days. As of December 31, 2004, debt securitiesconsisted of $14.5 million with original maturity dates of 90 days orless and $103.2 million with original maturity dates of greater than90 days.

 
| ** **                                        | ** ** | **Carrying  value at  September 30,  2005** | ** ** | **Average  rate of  return at  September 30,  2005** | ** ** | **Carrying  value at  December 31,  2004** | ** ** | **Average  rate of  return at  December 31,  2004** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**                               | ** ** | **(annualized)**                                          | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                         | ** ** |
| **Cash, cash equivalents and debt securities**    |       |                                             |       |                                                      |       |                                            |       |                                                     |       |
| Cash  and cash equivalents—variable rate     |       | $                                                | 2,976      |                                                      | 2.7        | %                                               | $          | 3,022                                                    |       | 1.3 | % |
| Money  market funds—variable rate            |       | 3,040                                            |       | 3.6                                                       | %          | 951                                             |       | 2.0                                                      | %          |
| Cash  and cash equivalents—fixed rate        |       | 36,610                                           |       | 3.6                                                       | %          | 10,521                                          |       | 2.3                                                      | %          |
|                                              |       |                                             |       |                                                      |       |                                            |       |                                                     |       |
| Total  cash and cash equivalents                  |       | 42,626                                           |       | 3.5                                                       | %          | 14,494                                          |       | 2.1                                                      | %          |
| Debt  securities—fixed rate                  |       | 52,954                                           |       | 3.4                                                       | %          | 103,222                                         |       | 2.0                                                      | %          |
|                                              |       |                                             |       |                                                      |       |                                            |       |                                                     |       |
| Total  cash, cash equivalents and debt securities |       | $                                                | 95,580     |                                                      | 3.5        | %                                               | $          | 117,716                                                  |       | 2.0 | % |

 

**ForeignCurrency Exchange**

 

We transact businessprimarily in U.S. dollars. We are subject, however, to adverse movements inforeign currency exchange rates in those countries where we conduct business.To date, the effect of fluctuations in foreign currency exchange rates onexpenses has not been material. Operating expenses incurred by our subsidiariesin India and the United Kingdom are denominated in Indian Rupees and BritishPounds, respectively. We hold fixed-price agreements denominated in U.S.dollars with key foreign-based suppliers: Orient Semiconductor Electronics, inTaiwan, manufactures the Internet Location Manager; Taiwan SemiconductorManufacturing Company, in Taiwan, manufactures our Global Positioning Systemdigital receiver chips; Sierra Wireless, in Canada, provides the modem for someversions of the Internet Location Manager; and Micronet, in Israel, suppliesour Internet Data Terminal. Should there be a sustained increase in averageexchange rates for the local currency in any of the foregoing countries, oursuppliers may request increased pricing on any new agreements. If this were tooccur for all of these currencies and with each of these suppliers, a10 percent increase in average exchange rates could increase our productcosts by approximately 2.2 percent.

 

We do not use derivative financial instruments for speculative tradingpurposes, nor do we currently hedge any foreign currency exposure to offset theeffects of changes in foreign exchange rates. Similarly, we do not usefinancial instruments to hedge operating expenses of our subsidiaries in Indiaand the United Kingdom.

 

 

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**Item 4. Controls and Procedures.**

 

*Evaluation of Disclosure Controlsand Procedures*

 

As of September 30, 2005, we carriedout an evaluation, under the supervision and with the participation of ourmanagement, including our principal executive officer and principal financialofficer, of the effectiveness of our disclosure controls and procedures asdefined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934 (the “Exchange Act”). A disclosure control system, nomatter how well conceived and implemented, can provide only reasonableassurance that the objectives of such disclosure control system are satisfied.Because of the inherent limitations in all disclosure control systems, noevaluation of disclosure controls can provide absolute assurance that alldisclosure control issues, if any, within the company have been detected. Aspart of our evaluation, we considered factors such as whether data, if any,concerning significant changes to the Company’sbusiness, new agreements entered into during the quarter, changes inrelationships with suppliers and customers, new resource commitments,litigation matters, the material weakness described below and changes inaccounting interpretations were disclosed in connection with the disclosurecommittee’s investigation of such matters. In addition,we considered the comments, if any, of process owners regarding their awarenessof any matters that could give rise to additional disclosure. Based upon thatevaluation, as of September 30, 2005 our principal executive officer andprincipal financial officer have concluded, to the reasonable assurance levelof certainty that a disclosure system can provide, that our disclosure controlsand procedures are effective. Our disclosure controls and procedures aredesigned to provide a reasonable level of assurance of reaching our desired disclosurecontrol objectives and are effective in doing so. There were no significantchanges in our disclosure controls or in other factors that could significantlyaffect these disclosure controls subsequent to the date of their evaluation.

 

*Management’s Report on InternalControl over Financial Reporting*

 

As part of our first quarter 2005 closingprocess and assessment of internal control over financial reporting, weidentified an internal control deficiency that constituted a “materialweakness,” as defined by the Public Company Accounting Oversight Board AuditingStandard No. 2. The material weakness occurred during the first quarter of2005 and has continued through the third quarter of 2005. The material weaknessconcerned our interpretation and implementation of various complex accountingprinciples in the area of unique non-recurring transactions, specifically (a) ouracquisition of Vidus and (b) certain significant customer contracts.

 

With respect to the Vidus acquisition,the complex accounting principles included (i) accounting for acquisitionand integration costs incurred by Vidus as a result of its acquisition by us, (ii) thevaluation of Vidus’ deferred revenue, (iii) revenue recognition of apre-existing customer contract and (iv) deferred tax liability, asset andvaluation allowance. The phrase “certain significant customer contracts” refersto the pre-existing Vidus customer contract noted above and a customer contractto provide our mobile resource management solutions, which included more complexcontractual elements than are typically found in our customer agreements. Thematerial weakness related to these transactions, including the process ofdetermining the proper accounting to be applied to activities occurring underthe agreements and, with respect to the Vidus acquisition, certain estimatesand assumptions.

 

With respect to such unique non-recurringtransactions, we performed additional analysis relating to accounting for suchagreements in the context of preparing our financial statements. Afterdialogues with our independent registered public accountants and independentvaluation specialists, we revised our accounting treatment and conclusions andestimates and made adjustments to the balances that we ultimately used inpreparing our financial statements. Upon a determination that it wasappropriate to make such adjustments, we concluded that we had a materialweakness in our internal controls over financial reporting.

 

*Changes to Internal Control overFinancial Reporting*

 

There have been changes implementedto our internal controls over financial reporting during the second and thirdquarter of 2005.

 

As of September 30,2005, the Company had not fully remediated the material weakness describedabove.  During the second quarter of2005, we commenced implementation of a remediation plan to supplement ourexisting processes to (a) identify internally unique non-recurringtransactions occurring during the quarter and (b) assess the accountingtreatment to be used in connection with such transactions. These supplementalelements include (a) additional internal reviews of the underlyingtransactions and related accounting conclusions and (b) the use ofexternal consulting expertise to provide additional advice relating to ouraccounting interpretations. The phrase “external consulting expertise” meansthat the Company wouldengage the services of an independent registered public accounting firm orthird party with appropriate accounting knowledge and expertise.

 

To date, the Company has not incurred,nor does it expect to incur in the future, any material costs in connectionwith the remediation plan.

 

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**PART II.OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

From time to time, we aresubject to claims in legal proceedings arising in the normal course of ourbusiness. Based on our evaluation of these matters, we believe that thesematters will not have a material adverse effect on our operations or financialposition.

 

**Item 6. Exhibits.**

 
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification |
|--------|--------|--------------------------------------------------|
|   |   |                                             |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification |
|   |   |                                             |
| 32.1   |   | Section 1350  Certification                 |
|   |   |                                             |
| 32.2   |   | Section 1350  Certification                 |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **@ROAD,  INC.**                     |
|--------|--------------------------------------|
|   |                                 |
|   | By:                                  | /s/ Michael Martini |   |
|   |                                 |
|   | Michael Martini                      |
|   | Chief Financial Officer              |
|   | (Principal Financial  and Accounting |
|   | Officer)                             |
|   |                                 |
|   | Date: November 8,  2005         |

 

 

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***Exhibit Index***

 

**Exhibits**

 
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|--------|--------|---------------------------------------------------|
|   |   |                                              |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|   |   |                                              |
| 32.1   |   | Section 1350  Certification.                 |
|   |   |                                              |
| 32.2   |   | Section 1350  Certification.                 |

 

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